Introduction

You need to keep your sense of humor sometimes when tracking economic data but there aren't many laughs behind an outright plunge in consumer sentiment. The government shutdown may only be partial but its psychological impact appears to be considerable and may very well begin to slow the central source of the U.S. economy's great strength – consumer spending. Yet not all the week's news is bad and even though the bureaus of economic analysis and the census are on furlough there are still plenty of indicators to talk about. 

The economy

In what is the first major economic indication of trouble tied to the government shutdown, the Univeristy of Michigan's consumer sentiment index plunged to a 90.7 reading that was far below Econoday's low estimate of 95.5 and even further below December's 98.3. A nearly 8 point drop for this index is rare and was last approached in 2012 and 2011 which was early in the recovery when unemployment was running at 8 percent, roughly double what is it now. The 90.7 level itself is the lowest since October 2016, just before the broad surge across confidence readings that followed President Trump's victory. The graph tracks the blue line of consumer sentiment against the green line of consumer confidence, the latter published by the Conference Board that focuses especially on the consumer's assessments of the jobs market which have absolutely surged the last two years. The Conference Board's index, which is reported at the end of each month, dropped sharply in December when the immediate risk of a government shutdown first began to build.

But the signals from the week's economic news aren't all negative, not at all. The health of the labor market, on which consumer confidence ultimately depends, has yet to be visibly hurt by the government shutdown, at least based on weekly jobless data. Initial jobless claims have actually been on the decline this month, down 3,000 in the January 12 week to a 213,000 level that shows even stronger demand for labor than Econoday's consensus for 221,000. Yet there were nearly 5,700 claims filed by Federal workers in the week that followed the prior week's 4,000 total. These levels are much higher than normal and very likely reflect the early impact of furloughed workers. The path that Federal claims take in the coming weeks will be among the most closely watched of any economic data still released. Adding even greater importance to the latest claims data is that the January 12 week was also the sample week for the monthly employment report. This will be released on February 1 by the Bureau of Labor Statistics which is one statistical agency that remains open. Though there is guaranteed to be a lot of noise in the January report tied to definitions of full-time and temporary employment, to work not paid as well as the knock-on effects from non-government workers impacted by the shutdown, the actual sampling has already finished. And the indications from weekly jobless claims report point to another month of employment strength.

The week's good news doesn't stop with jobless claims. Mortgage rates have been coming down as financial investors late last year, prompted by safe-haven demand, by slowing global growth, and easing expectations for Federal Reserve rate hikes, poured into the bond market. Rates, now averaging roughly 4.75 percent for 30-year conforming fixed mortgages ($484,350 or less), are down a sizable 40 basis points or so from their November peak. This is good news for the nation's home builders who, given the steep late-year slump in new home sales, need some good news. The home builders' housing market index, at a better-than-expected 58 in January, posted its first increase since October and only its second increase since May. Improvement includes a 3 point gain to 64 for 6-month sales and a 2 point gain to 63 for current sales. The traffic component is also improving but not very much, up 1 point to a still weak 44. For the new home market, this report, given the interruption of definitive sales data from the Census Bureau, is suddenly taking on greater importance. And though housing was the weakest sector of the 2018 economy and despite the ongoing lack of buyer traffic, the housing market index hints at an early 2019 bounce.

In what was a very unexpected bounce, the manufacturing component of the industrial production, a report compiled by the Federal Reserve which is unaffected by the government shutdown, jumped 1.1 percent in data for December. The gain reflects a surge in motor vehicle production together with gains for construction supplies and also business equipment, the latter of special note given the economic importance of business investment in future productivity. Mining production, at 1.5 percent, also rose sharply in December though utility production, down 6.3 percent and likely reflecting unseasonably warm weather, was an offset that held down overall industrial production to an as-expected but still respectable 0.3 percent gain.

A big gain for vehicle production was one of the most striking results of the week's data. Boosted by rising production of both autos and especially of light trucks and despite what has been a mostly flat run for vehicle sales, vehicle production jumped 4.7 percent in December to an index level, as tracked in the graph, at nearly 135. The contrast with non-vehicle production is evident as this index is still subdued but neverthless on the climb at 104. Vehicle production has been an important contributor to the economic expansion though it can be bumpy and December's gain could well reverse in January, yet the strength may mark a vote of auto-sector confidence in the outlook for 2019 consumer sales.

Fedspeak was mercifully light in the week and prior speak was arguably on the dovish side. Unquestionably dovish have been actual inflation data with most of the related series uninterrupted by the government shutdown. Consumer prices posted in the prior week did not show much acceleartion at all with the core rate, as tracked in the red line, holding steady at a 2.2 percent year-on-year rate. Moving clearly lower in the latest week was the blue line of inflation expectations at the business level as tracked by the Atlanta Fed. This reading fell an unusually sharp 3 tenths to a January reading of 2.0 percent which instead on hinting at inflationary expectations hints rather at disinflationary expectations. This perhaps falls in line with slowing demand at the global level, something that businesses can be especially tuned into. The green line of inflation expectations at the consumer level as tracked by the University of Michigan is also subdued, unchanged in January  at 2.7 percent which is the bottom of its recent range.  

Last year's sudden and steep fall in the price of oil is no doubt a factor behind the weakness in inflation expectations. Import prices fell sharply in December with the year-on-year rate moving into contraction at minus 0.6 percent vs plus 0.5 percent in November with export prices moving lower to plus 1.1 percent from 1.9 percent. Oil of course is a key import for the U.S. while for exports, low oil prices are reflected in lower prices for petroleum-based industrial goods that include chemicals and plastics. The ongoing recovery in oil prices, up nearly $2 this week alone to $53.72, does point to an overall bounce for future prices but probably not for ex-energy readings nor for prices of finished goods. Whether on the import or export side and whether for consumer goods or capital goods or autos, prices for finished goods have been astonishingly flat, showing no traction and sometimes outright declines for the last six years. And likely losing traction altogether along with the price data may be the need for any further rate hikes.

Turning back to the surprising gain in manufacturing production, a rundown of the week's data wouldn't be complete without looking at the Empire State and Philly Fed reports. Regional reports, especially those from Richmond, Dallas and also Kansas City, showed sudden slowing and even contraction late last year. These all pointed to weakness for December's manufacturing production data that instead, as we saw, shot higher on broad strength. The first indications on what to expect for January's manufacturing performance are mixed with Empire State slowing sharply but Philly Fed accelerating sharply. The former showed weakness in orders and contraction in backlogs while the latter showed strong gains for orders and a continuing build in backlogs. How to read small sample reports like these isn't easy. But given their less-than-rigorous methodologies that can include respondents making rough estimates on questions, these reports may at times be no more than rough sentiment readings. Their accuracy aside, we must express gratitude that they will continue to be published without interruption regardless when the government reopens. 

Markets: Optimism on trade talks offsets shutdown spectacle

Reports on both sides of the U.S. and Chinese talks were very bullish in the week, whether the U.S. is backing off its demands on Chinese trade practices or whether the Chinese are promising to significantly lift their U.S. imports. A fading of the trade issue would be a major plus for the stock market and would coincide with what appears to be an easing in rate-hike worries. These were the two factors that depressed 2018 results for the major averages and their passing could offset worries over the government shutdown and help rebuild confidence in the stock market. The Dow rose in 3.0 percent in the week to 24,706 for an early year-to-date gain of 5.9 percent with the Nasdaq up a weekly 0.4 percent to 7,157 for a 2019 gain of 4.0 percent. Oil, now nearing $54, also had a strong week while money continued to move out of the safety of bonds as the 2-year Treasury yield rose a sizable 8 basis points in the week to 2.62 percent with the 10-year up 9 points to 2.79 percent.

The bottom line

The shutdown is the front-and-center issue right now facing the nation and the sharp drop in January's consumer sentiment index suggests it may very well be rattling and distracting the consumer. Yet lower mortgage rates are a clear plus for the housing sector while moderating inflation pressures are a very important overall positive that will hold back the threat of Federal Reserve rate hikes. Throw in a constructive and agreeable end to the U.S. and Chinese trade talks, and the outlook for the 2019 economy and financial markets, shutdown or not, may not be so bad.

Week of January 22 to January 25

Martin Luther King Jr day on Monday makes for a Tuesday start to the week. Existing home sales are expected to slip in Tuesday's report for December that will be followed on Wednesday by the FHFA house price index where moderation is also the theme. Regional manufacturing reports have been mixed so far this month with the Richmond Fed's report, also on Wednesday, expected to show contraction for January while Kansas City on Thursday is expected to post a marginal gain. Jobless data and whether furloughed government workers are making claims will be Thursday's central focus though the flash PMIs and leading indicators will also be released. With durable goods orders and new home sales, Friday would have been the climax of the week if not for the government shutdown which looks to delay these two reports .

Tuesday

Existing Home Sales for December

Consensus Forecast, Annualized Rate: 5.240 million

Consensus Range: 5.200 to 5.400 million

A step back is what forecasters see for December existing home sales which in November posted a second straight gain and a 3-month high. December's consensus is a 5.240 million annualized rate vs November's 5.320 million. The year-on-year rate in November, at minus 7.0 percent, was the lowest in 7-1/2 years.

Wednesday

FHFA House Price Index for November

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

Consensus Range: 0.2% to 0.4%

Modest-to-moderate is what forecasters see for the FHFA house price index in November, at a consensus gain of 0.3 percent that would do no better than match October's rise. The year-on-year rate in October, at 5.7 percent, was the lowest since February 2016.

Richmond Fed Manufacturing Index for January

Consensus Forecast: -3

Consensus Range: -10 to 3

Orders and shipments contracted suddenly and sharply in December for the Richmond Fed manufacturing report where the index for January is expected to come in at minus 3. The index in December came in far below expectations at minus 8.

Thursday

Initial Jobless Claims for January 19 week

Consensus Forecast: 217,000

Consensus Range: 215,000 to 221,000

Federal employees on furlough drove up initial jobless claims in the January 5 and January 12 weeks but still only moderately. Claims have been very low and forecasters see only a limited increase in the January 19 week, at a consensus 217,000 vs what was a lower-than-expected 213,000 in the prior week.

PMI Composite for January Flash

Consensus Forecast: 54.2

Consensus Range: 54.0 to 54.3

PMI Manufacturing

Consensus Forecast: 53.5

Consensus Range: 53.4 to 54.3

PMI Services

Consensus Forecast: 54.2

Consensus Range: 53.9 to 54.4

Slight easing for services and clear moderation for manufacturing made for a dip in the composite PMI for December, to 54.4 and 3 tenths lower vs November (December updated from a 53.6 flash). The consensus for January's flash PMI composite is for continued but fractional slowing to 54.2, split between a services consensus of 54.2 and a manufacturing consensus at 53.5.

Index of Leading Economic Indicators for December

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

Consensus Range: -0.2% to 0.2%

The consensus for December's index of leading economic indicators is a decline of 0.1 percent vs a 0.2 percent increase in November. The stock market especially but also consumer expectations and ISM manufacturing orders look to be December negatives.

Kansas City Manufacturing Index for December

Consensus Forecast: 2

Consensus Range: 0 to 6

Marginal growth is the forecast for the January edition of the Kansas City manufacturing index, at a consensus 2 vs December's 12-point stumble to 3.

Friday

Durable Goods Orders for December

Consensus Forecast, Month-to-Month Change: 1.8%

Consensus Range: 0.8% to 3.5%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.1%

Consensus Range: -0.4% to 0.7%

Extending strength is the expectation for December durable goods orders where the consensus is calling for a 1.8 percent gain vs November's increase of 0.8 percent. Ex-transportation orders are expected to improve to a 0.1 percent increase which is marginal but better than the 0.3 percent decline in November. Core capital goods orders have been mixed, falling sharply in November after rising strongly in October. This report looks to be delayed by the government shutdown.

New Home Sales for December

Consensus Forecast, Annualized Rate: 565,000

Consensus Range: 540,000 to 580,000

If delayed as expected, new home sales will mark the first indicator to have been delayed twice by the government shutdown. The last comparison was 544,000 in October. New home sales were expected to rise to 560,000 in November with 565,000 the consensus for December.