Tags: economy | government | shutdown

Shutdown Has 'Real Economic Consequences'

united states capitol building in washington, dc with shutdown stamp effect

Paul Brady | Dreamstime.com

Friday, 18 January 2019 04:14 PM Current | Bio | Archive

INDICATOR: December Industrial Production and Mid-January Confidence

KEY DATA: IP: +0.3%; Manufacturing: +1.1%/ Consumer Sentiment: -7.6 points

IN A NUTSHELL: “The economy may have ended 2018 on a positive note, but the government shutdown is proving to be a real downer.”

WHAT IT MEANS: The Fed doesn’t depend upon the government to fund its operations, so it continues to churn out its data. One of the key numbers is industrial production, which rose solidly in December. Manufacturing activity soared, led by a surge in vehicle assemblies and a rebound in the oil and gas industry that had faded with the sharp drop in prices. Output also jumped in the food, wood products and aerospace and transportation industries. The machinery industry slowed sharply, but it had been expanding strongly for months. Apparel was the other weak link, but that industry was up and down all year. Basically, this was a strong report that showed broad based increasing manufacturing output.

Whether manufacturing can sustain its solid growth depends, in no small part, on consumer spending. And at least in the short-term, spending is affected by confidence. Well, the government shutdown is taking a major toll on household confidence. The University of Michigan’s Consumer Sentiment Index cratered in the first half of January. Job and wage expectations fell, while perceptions on the need to save increased. Consumer attitudes that are affected by political evens usually don’t translate into major changes in consumption unless the concerns persist. Thus, we have to wait and see if the downturn in sentiment is temporary or longer lasting.

MARKETS AND FED POLICY IMPLICATIONS: The situation in Washington is only worsening, as the president and the Speaker of the House are playing tit for tat. Hardly a way for anyone to run a government but both bases will love the attacks. It is not clear what will change the political dynamic, but I suspect it will have to be a major crisis. Wait lines at airports of an hour or more may be one thing. Screw-ups with tax refunds could be another. But who knows? There are real economic consequences. The lost wages are not just hurting the government workers who are not being paid. Businesses that depend upon the spending of those workers or government programs that are shuttered are also feeling the pain. The longer the shutdown persists, the more the impacts will turn into long-term issues rather than just temporary concerns. First quarter growth could easily be less than two percent, especially if we go another month. The drop in consumer sentiment is an initial warning sign. There is only so long we can go with totally dysfunctional government before both consumers and businesses become significantly more cautious and the slowdown that is coming from the fading impacts of the tax cuts turns into a major softening in growth. There is no such thing as a free government shutdown and the costs are still to be determined.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The economy may have ended 2018 on a positive note, but the government shutdown is proving to be a real downer.
economy, government, shutdown
Friday, 18 January 2019 04:14 PM
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