Data delayed due to the government shutdown have begun to arrive, filling in the picture for 4Q18, and we’re also getting fresher data on the economy in early 2019. The figures have been mixed, and often surprising, which allows one to make about any kind of argument one wants. However the data are also consistent with a slower pace of economic growth. For financial market participants and Federal Reserve officials, expectations of the economy may be in flux, but are likely to remain positive.
The biggest shocker among recent economic data reports was the unexpected plunge in retail sales in December. As expected, motor vehicle sales rose and gasoline sales fell (reflecting lower prices). Core sales were expected to have risen modestly, but fell 1.6% instead. Now, it’s important to remember that the retail sales report is based on a statistical sample, so there is a fair amount of uncertainty. Seasonal adjustment is often tricky, especially in December. It’s possible that the partial government shutdown had an impact, either through creating problems with the data collection or by dampening spending. In its report, the Bureau of Census never supplies any color (for example, if sales might have been effected by adverse weather). Most government shutdowns tend to be short, holiday sales are fueled more by credit, the first missed paycheck wasn’t until January 11, and federal workers expected to be paid eventually. Still, there may have been secondary effects (unpaid government contractors), spending may have been curtailed due to all the talk of a possible recession, and workers may have just been a lot more sensitive to disruptions than we think. Take the December data with a grain of salt (although auto loan delinquencies are on the rise). The figures are subject to revision. Note that January and February data, to be released in the weeks ahead, may not help to clarify the consumer picture (as these are the seasonal doldrums for most retailers). So, while the “strong consumer” scenario may be at risk, the bigger test will come in the spring – and the fundamentals of the household sector still appear strong.
Retail sales account for about a quarter of consumer spending and consumer spending accounts for 68% of Gross Domestic Product. Hence, the report has led economists to lower their expectations for 4Q18 growth. Inventory data also suggest a much slower pace of accumulation, which subtracts from headline GDP growth.
Consumer and business expectations dropped in January, but it appears that much of the decline in consumer attitudes was related to the government shutdown. The University of Michigan’s Consumer Sentiment Index rebounded in the report for mid-February, and we likely would have seen a bigger bounce if not for concerns about a possible second shutdown (since averted).