This Week In The Economy: Looming Govt Shutdown, Fed Hikes Rates Again, German Businesses’ Dour Sentiment

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.

The U.S. government will partially shutdown at midnight Eastern Time if lawmakers are unable to agree on a stop-gap spending bill that funds federal agencies. A continuing resolution funding several nine Cabinet departments, including Homeland Security and the Justice Department, expires at midnight Friday.

The main sticking point? Money for President’s Trump wall on the U.S.’ border with Mexico. A shutdown looked to be averted earlier this week when Democrats and Republicans in the Senate struck a deal on a short-term bill that would keep the government open until February 8. This bill did not include funding for the wall. Trump was not pleased:

This spooked the Republican-controlled House, who then rejected the Senate’s bill and passed their own version with $5.7 billion included for Trump’s wall. The measure now goes to the Senate for a vote today, but the outlook is grim given 60 votes are needed to pass it, and there is strong opposition from Democrats. If no agreement is struck today, there is a high risk the government remains shutdown until the new Congress takes over on Jan. 3, 2019.

The Federal Reserve this week announced another interest rate increase at its final meeting of 2018, while predicting a less aggressive pace in 2019 given the uncertain outlook for the economy next year.

In its statement announcing the decision, the Fed’s Federal Open Market Committee (FOMC) cited the strengthening labor market and rapid clip of economic activity as major reasons for the move. The body did soften its guidance on future interest rate policy, saying:

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion.”

The statement added the Fed will assess “realized and expected economic conditions” relative to its employment and inflation objectives in determining the timing as well as size of future interest rate adjustments. To further underline the less rosy outlook for 2019, the FOMC’s median forecast for the number of rate hikes they expect by the end of 2019 dropped from three hikes to two.

The Committee also gave a nod to the growing downside risks from the global economy, and vowed to “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

The Bureau of Economic Analysis reported today the U.S. economy grew by 3.4% in the third quarter of 2018. In the second quarter, real GDP increased 4.2%. Corporate profits with inventory valuation and capital consumption adjustments) increased $78.2 billion in Q3, compared with an increase of $65.0 billion in Q2.

Meanwhile new orders for manufactured durable goods such as computers and transportation equipment (a way to gauge the strength of business investment) increased 0.8% last month, a rebound from the 4.3% decline reported in October. Excluding transportation, however, new orders decreased 0.3%. Excluding defense, new orders decreased 0.1%.

Your TWITE column this week comes to you from London, where your favorite author is getting a head start on Christmas celebrations with some much-needed family time. When the news isn’t focused on the rogue drone that terrorized Gatwick Airport, all eyes remain on Britain’s increasingly-frantic steps to secure a deal on its 2019 exit from the European Union.

This week UK Prime Minister Theresa May met with her counterparts from Northern Ireland, Scotland, and Wales to secure support for her Brexit deal. In a statement released by her office, the PM updated leaders on preparations being made — including a ‘no deal’ scenario — while emphasizing how the deal agreed with the EU works for the UK. May urged leaders to work with her and support the Brexit agreement “to protect the interests of all four nations of the United Kingdom.”

Also this week, the European Commission announced it has begun implementing its ‘Contingency Action Plan’ for specific sectors such as customs, financial services, and transportation in event of a hard Brexit. The package includes 14 measures focused on areas “where a ‘no-deal’ scenario would create major disruption for citizens and businesses in the EU27,” the Commission said.

The Commission described it as “essential and urgent” to adopt these measures to ensure that the necessary contingency measures can enter into application on 30 March 2019 (Brexit D-Day) “in order to limit the most significant damage caused by a ‘no-deal’ scenario in these areas.”

China and the United States hit pause on their ongoing trade war at the beginning of this month after Trump and Xi Jinping met on the sidelines of the G20 leaders gathering in Buenos Aires. This week saw additional talks at the junior level, and Treasury Secretary Steve Mnuchin announced plans to hold a formal, face-to-face meeting in January.

The deadline before the current tariffs truce runs out is March 1, 2019 and both sides remain far apart in their demands. The U.S. would like to China to make significant structural changes to its economy, and secure comparative market access for American companies. But in a speech this week, China’s Xi Jinping warned that “No one is in a position to dictate to the Chinese people what should or should not be done.”

Earlier this month OPEC reached an agreement with other major oil producers, including Russia, to cut their collective crude oil output by 1.2 million barrels per day — a move intended to counter the plunge in global oil prices. The outlook for oil prices has been battered by the gloomy 2019 outlook for the economy, as well as the surge in supply.

So far, OPEC’s actions have failed to halt the decline. On Dec. 7, the day of the announcement, OPEC’s daily price basket — an average members’ benchmark crude prices — stood at $59.20. It fell to $53.92 as of Dec. 20. Meanwhile Brent crude, after briefly soaring above $60 per barrel following the OPEC decision, has been on a mostly downward trend since.

Source: BBC

Continuing a trend seen all year, U.S. housing data released this week shows a market that continues to be buffeted by a mix of low demand, rising interest rates, and changing demographics.

The Census Bureau reported that privately‐owned housing starts in November were at an annual rate of 1,256,000, higher than October but 3.6% below
the November 2017 rate of 1,303,000. Single‐family housing starts in November were at a rate of 824,000; 4.6% below the October, and down 13% compared to November 2017. On other hand, the November start rate for buildings with five units or more jumped 25% from October, and by 20% compared to the same month a year ago.

As for sales of existing homes, the National Association of Realtors said home resales increased 1.9% in November to a rate of 5.32 million, but are down 7.0% from a year ago (5.72 million). The NAR said properties stayed on the market for 42 days in November, up from 36 days in October and 40 days a year ago.

“ Concern is growing among German businesses.” That was the conclusion of the Ifo Institute’s latest business survey, whose Business Climate Index fell in December. Companies were less satisfied with their current business situation, and business expectations also continued to deteriorate.

The heightened negativity was most apparent in the country’s powerhouse manufacturing sector, where business expectations turned negative for the first time since May 2016. “In line with these developments, manufacturers scaled back their production plans,” the report said.

Japan’s central bank this week chose to maintain its monetary policy support for the world’s third largest economy “for an extended period of time,” while warning of the risks posed by global developments.

Among the risks listed by the Bank of Japan in its policy statement after its last meeting of 2018 where: the U.S. macroeconomic policies and their impact on global financial markets; the consequences of protectionist moves; developments in emerging and commodity-exporting economies; the fallout from Brexit negotiations; and geopolitical risks.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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