Introduction

The partial shutdown of the government is not only making economic data scarce but may soon begin to affect employment as furloughed workers begin hitting the pavement. But that's the story to come. This week's economic story is once again very favorable, showing steady and moderate price pressures, increasing wage traction, and once again a dovish sounding Fed.

The economy

A swing lower for energy costs pulled down overall consumer prices in December though, at the core rate, prices were steady and moderate. The CPI slipped an as-expected 0.1 percent on the month with the year-on-year rate down 3 tenths to end 2018 at 1.9 percent, also as expected and just below the Fed's 2 percent target. The ex-energy ex-food core rate also came in at expectations, up 0.2 percent for a 2.2 percent rate which is unchanged from November. Energy costs, reflecting oil prices, fell sharply on the month to end the year flat, at minus 0.3 percent. Energy, despite making up less than 10 percent of total prices, has had an historically oversized impact on the overall CPI, especially evident during 2014 after that year's collapse in oil prices. Housing and medical costs make up just more than half of the total CPI and here December's results are steady, up moderately in the month to end the year with respective increases of 3.0 and 2.0 percent. Medical costs in 2018 were held down by only a 0.6 percent yearly rise in physician services that offset a 3.7 percent gain for hospital services. Food prices rose only 1.6 percent in 2018 with apparel costs dead flat both on the year and, importantly, for December which doesn't point to much acceleration for apparel stores during the holidays. And wireless telephone services, which have been the source of volatility in prior years, extended a long series of declines in December to end the year 3.2 percent lower.

The CPI core looks to gain prominence if the government shutdown persists and delays the release of personal consumption data and with it, the core PCE index which is the specific price index that the Fed most closely tracks. The PCE index is flexible and allows for consumer substitutions to lower priced products when prices rise, which helps make it run slightly below the CPI as tracked in the two lines of the graph. A third critical price index was posted in the prior week, average hourly earnings which at just over 3 percent are at multi-year highs. Pressure over 3 percent in this series is traditionally considered the level that begins to pass through into general prices in what is a small caution signal for Fed policy makers.

The roughly 3 percent yearly gain against the roughly 2 percent inflation rate makes for a 1 percent rise in inflation-adjusted earnings, or precisely 1.1 percent for December as indicated in the graph. This is modest but is the fifth gain in a row for the best showing in more than two years. Rising wages and low inflation is of course the ideal mix for everyone though current rates still have a ways to go to match the nearly 2.5 percent rate through most of 2014. This is when the drop in oil prices helped drive down inflation and drive real earnings up.

The rise in real earnings is far from out of control and shouldn't impede a less hawkish stance from the Fed. And less hawkish seemed in fact to be the week's Fed theme. Recall back to December's FOMC when the Fed not only raised rates but, in what seemed to contrast with a round of dovish Fedspeak that preceded the meeting, scaled back their expected 2019 hikes by only one, from three to two. In fact as it turns out, based on the minutes of the meeting, a "few" of the 17 members didn't want to raise rates at all at saying inflation pressures were absent. And the remaining members appeared to be cautious in their outlook for further hikes, agreeing they could "afford to be patient" and that "relatively limited" additional tightening would be necessary. Wait-and-see was also what Jerome Powell stressed in comments later in the week, saying there is no preset path set for interest-rate policy and that the Fed can be patient to see how economic risks play out. The Fed chair said incoming data, highlighted by the prior week's surge in nonfarm payrolls, are not showing indications of an economic slowdown.

But there are risks at play, less of recession and perhaps more of overheating, at least overheating in the labor market. This was underscored strongly in the 312,000 surge for December payrolls though in November's JOLTS report the theme is slight cooling. Strains in the labor market actually appeared to ease in November as the number of job openings fell to 6.888 million against 7.131 million in October. Yet the separation between openings and the number of unemployed actively looking for work remained very wide, at 870,000 in November's data though down from the 1.096 million record in August. Openings moved ahead of the unemployed in March last year for the first time in 19 years of records. But given the sharp rise in the number of unemployed looking for work in the December employment report, to 6.294 million from November's 6.018 million, the separation between openings and unemployed looks to narrow further in next month's JOLTS report.

Like the number of openings, the number of hires also moderated in November, to 5.701 million from October's 5.928 million. The separation between openings and hires, like the separation between openings and unemployed, remains very wide, at 1.178 million but down from August's peak at 1.387 million. This comparison first broke over 1 million in March last year. Looking back at December's payrolls, employers stepped up hiring sharply which will help limit the opening-hires separation in the next JOLTS report. Turning to quits, this number had been moving higher in an indication that workers were growing more confident and were on the hunt for higher pay. But quits in November's report, extending the theme of easing pressure, fell to 3.407 million from 3.519 million. Altogether, the rise in the number of unemployed looking for work along with the easing in openings are lowering the risk that the nation's available workforce is becoming depleted.

The next JOLTS report will close the book on 2018 employment while the first look at 2019 conditions is clouded by, no surprise, the government shutdown. Layoffs tied to the government shutdown appear to have lifted initial jobless claims in the January 5 week. Claims filed by Federal employees rose 3,831 to 4,760 which very likely reflects the initial effects of furloughed workers. Nevertheless the week's total, at 216,000, was still lower than expected to offer an indication of strength in the labor market. Yet the outlook for claims in coming weeks, given the shutdown, is an open question.

The government shutdown has delayed data from the Commerce Department, specifically data compiled by published by the Census Bureau and Bureau of Economic Analysis (BEA). These reports are concentrated in consumer spending, cross-border trade, inventories, business investment and residential investment -- all components of GDP. In contrast, the Labor Department remains open and will continue to publish employment and inflation data which are the two specific pillars of Federal Reserve policy. Apparently then, if the shutdown is extended, economic assessments will increasingly have to be made less on production and consumption and more on an employment equation, that is changes in payrolls. Economic assessments will also have to rely more on private surveys like those from the Institute for Supply Management and Markit Economics. Their December reports on non-manufacturing and services speak to slight moderation at still very solid rates of growth. The sharp looking 3.1 point dip in the ISM's non-manufacturing index to 57.6 is really a head fake, reflecting slowing in production and a sharp improvement in delivery times. The real news is that new orders jumped for ISM's sample which points to an overall bounce higher in the next report for January.

Markets: Living with volatility all the time

West Texas Intermediate is swinging wildly, recovering back over $50 so far this year after plunging more than $20 at year end. Though U.S. oil inventories at nearly 440 million barrels in the January 4 week are still moderate and well below the 535 million barrel peak early last year, prices nevertheless tend to go down as inventories go up. Production cuts and OPEC compliance are always difficult to depend on, less so for the demand side which is likely to move in line with consumer spending. This outlook is favorable. Like for oil, volatility has of course also hit the stock market, this tied to a mix of Federal Reserve rate hikes, China-U.S. tariff negotiations, and now the government shutdown.

The bottom line

The week's economic data had a dovish feel and though December's turn lower in overall inflation will likely reverse due to the ongoing gain in oil, core inflation looks stable for now. And wages, though firming, remain moderate. The week's Fed news and Fed speak were also moderate, though that may be a repeating theme: dovish talk going into an FOMC meeting which produces results that are less than dovish. In the meantime, the Fed and everyone else will have to be "informed by incoming data", however scarce it may become.

Week of January 14 to January 18

A likely delay for retail sales on what would have been a Wednesday release would be the most significant effect yet from the government closure. The report would have provided the first inputs into December consumer spending and offered the first definitive evidence of the success or failure of the holiday shopping season. Outside of retail sales, the most important release will be the Federal Reserve industrial production data on Friday where an expected 0.3 percent consensus gain for the December headline would mask what is expected to be another very weak showing and a year-end fizzle for the manufacturing component. Empire State on Monday and Philly Fed on Thursday will offer the first looks at 2019 manufacturing activity. Yet another Fed report, the Beige Book, will be out on Wednesday in anecdotal commentary that routinely understates the strength of the economy. Wednesday's housing market index will offer what looks to be, because of the shutdown, one of the very few indications on the new home market. Housing starts and permits, scheduled for Thursday, are likely to be delayed. December's weakness in oil prices is expected to hold down both producer prices on Tuesday and import & export prices on Wednesday.

Tuesday

PPI-FD for December

Consensus Forecast, Month-to-Month Change: -0.1%

Consensus Range: -0.2% to 0.1%

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

Forecasters expect producer prices in December, reflecting the month's decline in oil, to slip slightly following a November report that was also held down by oil. After November's 0.1 percent increase, a dip of 0.1 percent is expected for December producer prices. When excluding food and energy, prices are expected to rise 0.2 percent while excluding food, energy and trade services, a 0.2 percent increase is also expected.

Empire State Index for January

Consensus Forecast: 12.0

Consensus Range: 10.9 to 13.0

At a consensus 12.0 vs 10.9 in December, steady solid growth is the expectation for January's Empire State index. Nevertheless, slowing in new orders and contraction in unfilled orders during December are likely to limit January's activity.

Wednesday

Retail Sales for December

Consensus Forecast: 0.2%

Consensus Range: 0.0% to 0.5%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: 0.0% to 0.4%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.5%

Consensus Range: 0.4% to 0.9%

Steady and modest growth is expected for retail sales in December, at a 0.2 percent gain that would match November. Ex-auto sales are also expected at 0.2 percent. Gasoline prices were weak in December which should boost the strength of the ex-auto ex-gasoline reading where the consensus gain is 0.4 percent vs November's 0.5 percent. November at 0.9 percent and October at 0.7 percent were unusually strong months for the control group and modest slowing is the expectation for December, to a consensus 0.5 percent gain. Note this report is likely to be delayed due to the government shutdown.

Import Prices for December

Consensus Forecast, Month-to-Month Change: -0.9%

Consensus Range: -1.6% to -0.4%

Export Prices

Consensus Forecast, Month-to-Month Change: -0.3%

Consensus Range: -0.9% to 0.1%

Forecasters, reflecting the price of oil, see December import prices falling 0.9 percent after an oil-deflated 1.6 percent plunge in November. Export prices, which fell a sharp 0.9 percent in November despite a price bounce for farm products, are expected to slip another 0.3 percent.

Business Inventories for November

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.6%

A moderate 0.3 percent increase is the consensus for November business inventories in what would be the eighth straight constructive monthly build. Note this report is likely to be delayed due to the government shutdown.

Housing Market Index for January

Consensus Forecast: 57

Consensus Range: 54 to 58 

Only a very limited rebound is expected for January's housing market index where the call is 57 following December's 4-point loss to 56. The sudden plunge in this index began in November with an 8-point rout to 60.

Beige Book

Prepared for the FOMC Meeting on January 29 & 30

The Beige Book's assessments of economic conditions have been noticeably and consistently softer than those of the FOMC. Instead of "strong", which was the FOMC's assessment of most economic factors in December, "modest-to-moderate" with a leaning toward the modest side was the Beige Book's verdict going into the meeting. And though the FOMC's assessment of the labor market was strong, the last Beige Book warned that a scarcity of qualified labor was resulting in slower payroll growth and was holding back business expansion. This report may offer early business commentary on the initial effects of the government shutdown.

Thursday

Housing Starts for December

Consensus Forecast, Annualized Rate: 1.256 million

Consensus Range: 1.200 to 1.330 million

Building Permits

Consensus Forecast: 1.297 million

Consensus Range: 1.230 to 1.328 million

Housing starts and permits have been struggling this year with no improvement the expectation for December. Forecasters see December starts coming in at a 1.256 million annualized rate which would match November with permits seen at a 1.297 million rate and down from November's 1.328 million. Single-family data, which are the dominant component in this report, have been especially weak in recent reports in contrast to noticeable acceleration for multi-family units. Note this report is likely to be delayed by the government shutdown.

Philadelphia Fed Manufacturing Index for January

Consensus Forecast: 10.0

Consensus Range: 9.4 to 11.0

Steady strength at a consensus 10.0 is the call for Philly Fed's manufacturing index for January which in December missed expectations for a second month in a row at 9.4. The December headline did, however, mask substantial strength in orders, employment and also selling prices.

Friday

Industrial Production for December

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.0% to 0.6%         

Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.4%

Capacity Utilization Rate

Consensus Forecast: 78.5%

Consensus Range: 76.7% to 78.7%

Slowing is the consensus for December industrial production to a rise of 0.3 percent vs a 0.6 percent jump in November that was led by rebounds in both utility and mining production. Manufacturing production proved soft in November at no change and is seen rising only 0.1 percent in December. Capacity utilization is expected to hold unchanged at 78.5 percent.

Consumer Sentiment Index, Preliminary January

Consensus Forecast: 97.0

Consensus Range: 95.5 to 98.3

At a consensus 97.0, the consumer sentiment index is expected to ease noticeably in the preliminary reading for January. December's final reading was 98.3 with the month's preliminary reading at 97.5.