This Week In The Economy: No End In Sight For Govt Shutdown, Job Creation Ends 2018 On A Strong Note, Concerns About China’s Economy

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.

New Congress — Federal Government Still Shut Down

Normally we would lead of this column with the robust December employment figures released this morning, but we must begin with the ongoing partial government shutdown and the stand-off between President Trump and newly-empowered congressional Democrats.

The 116th U.S. Congress was sworn in this week and soon after, the Democrat-controlled House passed legislation to provide stopgap funding for the Department of Homeland Security — but without the $5 billion in funding Trump has demanded to build a wall along the U.S.-Mexico border.

The House also approved another set of bills to reopen other federal agencies closed since the partial shutdown began December 22, providing them with funding through September 30.

However, these measures are dead on arrival in the Republican-controlled Senate, where GOP leaders have said they will not vote on any legislation that does not have Trump’s support. The president has made it clear he will veto any legislation passed by Congress that does not include money for his wall.

Currently, several government agencies representing about 25% of federal discretionary spending remain closed due to a lack of funding — with around 800,000 federal employees working without pay or told to stay home. Economists have warned that should the shutdown drag on for several more weeks or even months, the negative impact on economic growth could become more material — especially if it spills over into the February and March tax refund season, as the Internal Revenue Service is one of the agencies that currently does not have funding. Many Americans tie their Spring spending decisions to their expected refunds, and any delay could significantly impact consumer spending.

U.S. Job Creation Soars Past Expectations In December

After some disappointing economic data and worrying corporate news (more on that later) to start the week, we got some good news today with the Bureau of Labor Statistics report that the U.S. economy added 312,000 jobs in December. Payroll employment for November was revised up from +155,000
to +176,000, and the change for October was revised up from +237,000 to +274,000.

The monthly increase was broad-based, with job gains in health care, food services and drinking places, construction, manufacturing, and
retail trade. Payroll employment rose by 2.6 million in 2018, compared with a gain of 2.2 million in 2017.

Average hourly earnings remained strong, up 3.2% in December compared to a year ago. The unemployment rate rose to 3.9%, as the booming economy encouraged more unemployed workers to join the labor force. As a result, the participation rate ticked up to 63.1% from 62.9% in November.

This report, in a week of major financial market upheaval, is likely to encourage the Federal Reserve to maintain its approach of data-determined interest rate policy.

Souring Sentiment Among U.S. Manufacturers, Growing Concerns About China’s Economy

In the latest affirmation of slower economic growth ahead, the Institute for Supply Management’s manufacturing index, a key gauge of U.S. factory activity, posted its largest one-month drop in a decade and, at 54.1, is now at a level not seen since November 2016.

The report showed a softening of demand, with the decreases in new orders, production, employment, and inventories. Meanwhile the Prices Index registered 54.9, a 5.8-percentage point decrease from the November reading of 60.7, indicating higher raw materials prices for the 34th consecutive month.

Hot on the heels of this disappointing news was the announcement by Apple CEO Tim Cook that the tech giant’s revenue for its fiscal 2019 first quarter will be lower than initially expected. In particular, Cook cited “ the magnitude of the economic deceleration” in Greater China (China, Hong Kong, and Taiwan), blaming increased trade tensions with the United States and the resulting impact on consumer demand.

“ We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.” — Apple CEO Tim Cook.

Activity in the world’s second largest economy began to slow in the second half of 2018, with China’s Q3 GDP growth the second lowest in the last 25 years. And on the back of more troubling data this week, the People’s Bank of China (its central bank) again cut bank reserve ratio requirements by 1%. The rate falls from 14.5% to 14% on Jan 15, and then to 13.5% on Jan 25. The government is also urging large state-owned banks to lend more.

U.S. and China Set For Face-To-Face Talks Later This Month

Additional actions by China’s central bank are expected this year as the economy continues to lose steam (the RRR cut is already the fifth in the past 12 months), and a lot of hope will be on the U.S. and China reaching a lasting agreement over trade.

China’s Commerce Ministry announced negotiations will be held on January 7–8 in Beijing, the first formal talks between both sides since Trump and Xi Jinping agreed to a truce at the G20 summit in Argentina late last year. The gathering is expected to focus on intellectual property protections and Chinese industrial policy, and should lay the groundwork for a February visit by Chinese officials to Washington D.C.

Around The Horn…

TPP Trade Agreement Excluding United States Now In Effect: On December 30, 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) went into effect — a free trade agreement that the flow of goods and services between 11 countries. The CPTPP was signed by Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam.

ECB Takes Over Struggling Italian Bank: The European Central Bank this week took control of Italy’s Banca Carige, appointing temporary administrators for the country’s 10th largest lender, in an effort to reassure investors and stave off a broader banking crisis. The move came after most of the bank’s board of directors resigned following failed efforts to raise fresh capital.

Entering Crucial Stretch For Brexit: The deadline for the UK’s exit from the European Union is now only 12 weeks away, and PM Theresa May is nowhere close to securing the support she needs to get her negotiated deal with the EU through Parliament. The longer the impasse drags on, the greater the risk of a hard Brexit. As things stand, the DUP — the Northern Irish unionist party and a key part of the UK’s coalition government — is refusing to back May’s deal due to concerns it will create new barriers between Northern Ireland and the rest of the UK.

Oil and U.S. Retail Gasoline Prices End Year Lower: Declining oil prices, high gasoline inventories, and flat U.S. consumer demand helped drag the U.S. average gasoline price down by nearly $0.50 per gallon between October and December.

Source: Energy Information Administration

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

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