INDICATOR: January NonManufacturing Activity

KEY DATA: ISM (Nonman.): -1.3 points; Orders: -5 points; Jobs: +1.2 points/ Markit (Services): -0.2 point

IN A NUTSHELL: “The nonmanufacturing portion of the economy is still solid, but growth, as expected, is fading slowly.”

WHAT IT MEANS: While the government data mills try to dig out from the partial shutdown, the private sector keeps churning out its numbers. Today we got two readings on the nonmanufacturing portion of the economy and both showed continued solid growth but at a decelerating pace. The Institute for Supply Management’s NonManufacturing Index dropped moderately in January. The level tied the lowest over the past year. Of significance was a sharp slowing in new orders growth. On the other hand, job growth accelerated and backlogs expanded faster, so conditions are not that bad.

Confirming the modest slowdown in the services was a small decline in the IHS Markit Services Index. Yes, there was a drop, but the level remains high and that indicates growth in this sector is still quite solid. Indeed, the commentary indicated that demand remained strong, though not quite as good as it had been.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in very good shape, despite all attempts by Washington to make sure that would not be the case. The manufacturing sector continues to boom while the moderation in services activity is not particularly great. But as almost every economist has noted, the impacts from the tax cuts can last only so long and we are beginning to see them fade. It is impossible to determine how quickly the economy will come down from its sugar high, but I doubt it will suddenly collapse and take a nap. There is still hope that businesses may actually invest more this year. Of course, with over one trillion dollars in corporate buybacks vacuuming up much of the tax breaks, I am not counting on that happening. But, we can always hope. Since we will not get the first reading of fourth quarter GDP growth until February 28^th, we will be flying somewhat blind on exactly how well we were doing going into the shutdown. The consensus is for something in the 2.5% range, which seems reasonable and representative of the expected movement back toward trend growth. As for investors, there is the State of the Union speech tonight, the steak dinner meeting of the president and Chair of the Federal Reserve and tepid comments about a trade agreement with China to contend with. Today’s numbers will likely go largely unnoticed.

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