Monthly Economic Review: January 2019

Moving forward with limited visibility on the economy
MER January 2019

What a difference a year makes. At this point in 2018, all signs were clear that the U.S. economy had considerable momentum, from the boost provided by just-passed tax reform to the full range of usual indicators on employment, consumer confidence, inflation and other factors. It did, in fact, turn out to be a very strong year with gross domestic product growing around 3 percent. (Final GDP numbers are not yet available; more on that in a moment.)

This year, it will be difficult to match that unusually high rate of growth — but the economy still appears to be sound. It has become much more difficult to read the signs, leaving questions and uncertainties about the performance of the economy. The financial markets have been extremely volatile and nearly impossible to anticipate or navigate. Unlike previous turbulent periods, the reasons are not necessarily obvious; factors we can identify include slowing global growth, the U.S.-China trade war and ripple effects from the United Kingdom’s Brexit negotiations. In addition, the Federal Reserve entered the fray in December when it raised the federal funds interest rate a quarter point for the fifth quarter in a row, to the 2.25 to 2.5 percent range.

Adding significantly to this mix is the uncertainty generated by the U.S. government’s partial shutdown, which has continued for more than a month now and is making it increasingly difficult to assess the economy. The Commerce Department is among the agencies that are closed and its wide range of vitally important reports — on fundamental data including retail sales, trade, construction spending, durable goods, new home sales and GDP — have all been postponed. Not having this data leaves us with a limited view on the performance of selected industries and the economy overall. If the 2013 government shutdown is a guide, it could take a month and a half to get the data flowing again even after the shutdown ends.

Fortunately, the Labor Department was among agencies that saw their funding approved before the shutdown began. That means employment, wage and inflation measures issued by the Bureau of Labor Statistics have not been affected and are being reported on time. Likewise, the Federal Reserve is self-funded and has conducted to report industrial production and consumer credit data on time.

Even with some numbers coming in, the lack of full economic data will likely make the Federal Reserve more cautious regarding its stance on monetary policy. While the near-term risk of a recession remains low, officials at the Fed are watching financial markets closely. The last time financial conditions tightened as sharply as this December was in December 2015, when the Fed raised rates for the first time since the Great Recession. Following that hike, unforeseen market volatility ensued due to slower growth in China and a tightening in financial conditions, with talk of a recession and potential stock market crashes splashed across the internet as markets dropped 10 percent over the course of 28 trading days. Nonetheless, 2016 ended as a pretty good year for the stock market, with the Dow Jones Industrial Average up 13.4 percent and the Standard & Poor's 500 up 9.5 percent, respectively.

At this point, it doesn’t appear that the Fed is in any hurry to raise rates this year now that inflation shows little sign of accelerating beyond its 2 percent target. Moreover, while there are uncertainties that pose risks, a period of wait-and-see is appropriate.

Consumer spending is at the center of the outlook. A slower pace for the economy in 2019 is expected, with growth perhaps in the 2.5 percent range. The last available data showed that consumer spending was tracking income and employment. For the 12 months that ended in October, wage and salary disbursements were up 4.4 percent. Retail sales for the first 11 months of 2018 were up 4.7 percent over the same period a year earlier. Further aiding households is the falling price of retail gasoline, which was down from an average $2.89 a gallon in early October 2018 to $2.22 currently. Most important for the year ahead will be ongoing strength in the job market, which will support consumer income and spending, both key drivers of the economy. Of course, the consumer will not be of much help if a surge in layoffs ensues, but this is not what we envision. The bottom line is that the economy is in a good place despite the stock market volatility and other major uncertainties. Growth is solid, but for how much longer is unclear.

Download this month's report, which includes the following charts and highlights:

  • Unemployment rate
  • Job openings and hires
  • Consumer price index
  • Earnings
  • Production
  • Housing index
  • Consumer credit
  • Leading economic index