This Week In The Economy: Fed Officially Hits Pause, Economic Cost Of Shutdown, U.S.-China Talks Enter Home Stretch

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Federal Reserve Hits Pause on Future Interest Rate Increases

The senior Federal Reserve officials met this week for their first monetary policy meeting of the year, and announced a more cautious approach to setting short-term interest rates going forward. After hiking four times in 2018, the Federal Open Market Committee left rates unchanged this time, noting the concerns about the global economy previously discussed here. The FOMC also said it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” to support job creation and keep inflation under control.

U.S. Economy Adds 300k+ Jobs In January

The FOMC statement did note the continued strength of the U.S. labor market, and the January employment situation report showed more job gains last month despite the record partial government shutdown.

Employers added 304,000 in January, and the
unemployment rate edged up to 4%, with job gains occurring in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing. According to the Bureau of Labor Statistics, the impact of the partial federal government shutdown contributed to the uptick in the unemployment rate. Among the unemployed, the number who reported being on temporary layoff increased by 175,000. The labor force participation rate is still stuck at low levels (63.2% vs 63.1% in December), but in more positive news average hourly earnings are up 3.2% compared to last year.

Lost Economic Activity Due To Partial Government Shutdown

The Trump administration and U.S. lawmakers have until Feb. 15 to reach a deal on border security that also funds the government and avoids another shutdown. A committee made up of Democrats and Republicans has been set up to hash out an agreement, although it is looking more likely the president might go it alone and declare a national emergency in order to get his wall money.

Meanwhile, the post-mortem continues on what impact the shutdown had on economic activity. The Congressional Budget Office in a report this week estimated that the five-week partial shutdown reduced GDP in the fourth quarter of 2018 by $3 billion. For the first quarter of this year, the CBO expects the level of real GDP to be $8 billion lower than it would have been.

In a separate report, the CBO predicted the U.S. economy will grow by 2.3% in 2019 — down from 3.1% in 2018 — as the effects of the 2017 tax cuts on the growth of business investment wane and government spending drops significantly in the fourth quarter of 2019. And the mood has soured among U.S. consumers. The Conference Board’s Consumer Confidence Index fell this month, dragged down primarily by consumers’ expectations:

“The Present Situation Index was virtually unchanged, suggesting economic conditions remain favorable. Expectations, however, declined sharply as financial market volatility and the government shutdown appear to have impacted consumers.” — Conference Board

Promising Signs In China-U.S. Trade Negotiations

Representatives of China and the United States sat down this week to continue talks to resolve the ongoing trade dispute between the world’s largest economies, with one month left before the three-month truce expires. China Vice Premier Liu He was in Washington for two days of talks, and President Trump will send his top trade negotiator Robert Lighthizer and Treasury Secretary Steve Mnuchin early in February to continue negotiations.

China is said to be planning a significant ramping up of its purchases of U.S. goods, while the White House noted in a statement that “ the two sides showed a helpful willingness to engage on all major issues.”

However, it is not a forgone conclusion that an agreement is just around the corner. “Much work remains to be done,” the White House also said, and reiterated that tariffs on Chinese exports will increase unless both sides “reach a satisfactory outcome” by March 1.

UK Parliament Votes To Re-open Negotiations With EU Over Brexit

The UK parliament this week voted to reopen Prime Minister Theresa May’s Brexit plan and send her back to Brussels to renegotiate terms of the deal. The ‘Brady amendment,’ which proposes replacing the contentious Irish backstop provision with “alternative arrangements,” could boost support for May’s original plan if no new deal can be reached with the EU and the March 29 deadline for the UK to leave the EU draws closer.

However, EU leaders adopted a hard line in response to the vote, making it clear they view the plan negotiated late last year is the best option on offer.

“The Withdrawal Agreement remains the best and only deal possible … The debate and votes in the House of Commons yesterday do not change that. The Withdrawal Agreement will not be renegotiated.” — European Commission President Jean-Claude Juncker

Nevertheless, May will head to Brussels sometime soon with an alternative offer that has more support within Parliament — it remains to be seen if the EU will continue to hold firm, or will the fear of Britain crashing out of the EU without a deal force both sides to compromise.

Euro Area Economy Ends 2018 On A Whimper, Italy In Recession

Data released this week underscored the worrying state of the eurozone economy, with the bloc’s real GDP growing by just 0.2% in the fourth quarter of last year — the same as in Q3 — and maintaining its slowest growth pace in four years. This after recording 0.4% growth in both the first and second quarters of 2018.

In Germany, retail sales plunged 4.3% in December compared to the previous month, and were down 2.1% compared to the same month in 2017. In Italy, the statistics agency reported a contraction in economic activity for two consecutive quarters, putting it in a technical recession. Fourth quarter GDP declined by 0.2%, following a 0.1% decline in Q3. The fourth quarter decline was fueled by decreased activity in the agriculture, forestry and fishing sectors, as well as a drop in domestic consumption.