Investors Must Hope for Best and Prepare for Worst
The U.S. partial government shutdown ends its fourth week and is starting to look like a crisis that could inflict serious damage to U.S. economic growth if it continues much longer.
That said, as a realistic investor I’d prefer to take some kind of an attitude like hoping for the best but nevertheless being prepared for the worst. I would certainly not underestimate the fat tail risks that would be generated if the shutdown event would go on for several months.
China Trade Talk Rumors
Yesterday, the Wall Street Journal reported: “The idea of lifting some or all tariffs was proposed by Treasury Secretary Steven Mnuchin in a series of strategy meetings, according to people close to internal deliberations. They say the aim is to advance trade talks and win China’s support for longer-term reforms.”
In the meantime, Treasury officials have denied the report that Mnuchin had proposed lifting China tariffs.
The Financial Times commented: “The U.S. Treasury secretary, had recommended pre-emptively lifting tariffs on Chinese imports to give more room for Beijing to make concessions on structural reforms.”
A Treasury spokesman commented: “Neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation with China. This an ongoing process with the Chinese that is nowhere near completion.”
Meawhile, a White House official added: “No new tariff decisions have been made. We are focused on the current 90 day period and the expected high level visit by China Vice Premier Liu He at the end of this month,” according to FT reports.
Anyway, markets turned positive on the news and remain positive for now, Reuters explained.
US Industrial Production and Capacity Utilization
Industrial production increased 0.3 percent in December after rising 0.4 percent in November. For the fourth quarter as a whole, total industrial production moved up at an annual rate of 3.8 percent, the Federal Reserve reported.
In December, manufacturing output increased 1.1 percent, its largest gain since February 2018. The output of mines rose 1.5 percent, but the index for utilities fell 6.3 percent, as warmer-than-usual temperatures lowered the demand for heating.
At 109.9 percent of its 2012 average, total industrial production was 4.0 percent higher in December than it was a year earlier.
Capacity utilization for the industrial sector rose 0.1 percentage point in December to 78.7 percent, a rate that is 1.1 percentage points below its long-run (1972–2017) average.
In the context of today’s rather quite negative perceptions about the near-term future of the outlook for the U.S. economy, the just released “relatively good” Federal Reserve’s Industrial Production and Capacity Utilization data should help investors to keep their calm and remain patient.
That said, investors could, if they want to, deepen somewhat their insight on the state of the U.S. economy by taking a look at here following information sources:
Firstly, there is the December 2018 Small Business Optimism Index of the National Federation of Independent Business (NFIB). The December Index reads: “The Small Business Optimism Index was basically unchanged in December, drifting down 0.4 points to 104.4. Job openings set a new record high, job creation plans strengthened, and inventory investment plans surged. On the downside, expected real sales growth and expected business conditions in six months accounted for the decline in the Index. Reports of higher worker compensation stayed near record levels, while reports of higher selling prices faded. Credit availability was not an issue. Over the past few months, owners’ expectations for the future have tempered, while reporting continued solid economic activity. The Index remains at historically high levels but can’t be expected to improve every month.”
Secondly, investors could take a quick look at two charts provided by the Federal Reserve of St Louis:
In my view, all that doesn’t look like the U.S. economy is heading for a recession any time soon. Of course, investors should always recall that recessions are most of the time triggered by unforeseen events and unexpected shocks.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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