Shutdown has economists flying blind at a crucial moment

Shutdown has economists flying blind at a crucial moment
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The federal government shutdown is into its fourth week now, making it the longest in history. There are many important problems that a federal shutdown presents. 

One that is far down the list for society at large but especially meaningful for financial markets and economists is the interruption of the collection and release of key economic data. 

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At a time when there is an unusual amount of debate and disagreement on the near-term outlook for the economy, now is a particularly bad time to be flying blind with respect to the economic data.

That being said, the timing of the federal government shutdown was fortuitous with regard to the economic data calendar.

For monthly releases that typically come out near the end of the month, federal agencies tend to accelerate the calendar in December in an effort to get everything out well before Christmas.

Thus, releases like GDP, personal income and spending (which includes the Personal Consumption Expenditure deflator, the Fed’s preferred inflation gauge) and durable goods orders were all published just before the impasse began on Dec. 22.

The other mitigating factor in the current government shutdown for the economic data calendar is that the Labor Department is among those agencies that had already received its funding for Fiscal Year 2019. As a result, a number of key releases, such as the monthly employment report and Consumer Price Index, have been compiled and released on schedule. 

In contrast, the Commerce Department is among the agencies that are currently shut down. That department includes both the Census Bureau and the Bureau of Economic Analysis (BEA), two of the primary federal economic data producers. 

These two organizations are responsible for a number of important data series, including retail sales, GDP, personal income and consumption and housing starts.

There have been a handful of second-tier releases delayed already by the shutdown, but the data hiatus begins to bite in earnest for the first time this week, when the December retail sales release is postponed. 

The consumer has been unusually robust in recent months, and private-sector indicators suggest that retailers did extremely well during the Christmas season, so I guess we can get by without retail sales, at least for a short time.

However, given that we find ourselves at a point where opinions regarding the economic outlook are unusually divided, an extended shutdown is going to begin to have a meaningful impact on the ability of economists to gauge the tenor of activity. 

Fed officials have begun to take note of the fact that an absence of key data will make it more difficult for them to set monetary policy. In particular, there are reasons for concern in the housing and manufacturing sectors. 

Housing activity cooled off considerably in 2018, so there have been some fears that this sector is sliding due in part to higher mortgage rates, while others take a more benign view that building activity has merely plateaued and home prices are moderating to a more sustainable rate of increase. 

Meanwhile, it may also be a pivotal time for the manufacturing sector, as this part of the economy is bearing the brunt of the uncertainty around trade policy as well as the price impacts on inputs caused by tariffs. 

The recent plunge in the Institute for Supply Management factory sector index for December raised concerns that manufacturing activity is sagging, so the lack of data on new orders for capital equipment is unfortunate. 

Finally, we would ordinarily be about two weeks away from getting the first estimate of fourth-quarter GDP growth, at a time when there is an unusually wide array of forecasts for the economy in 2019.

Economists and market participants can undoubtedly cope for another week or two with the relative scarcity of timely economic data due to the government shutdown, but the longer the impasse drags out, the hazier the assessment of the economy will be at a time when financial markets are already skittish and predictions for monetary policy this year are all over the map. 

Financial markets hate uncertainty, but unfortunately, that is exactly what is being served up in generous portions early in the new year.

Stephen Stanley is the chief economist for Amherst Pierpont Securities.