Feb 26, 2019
As Sam writes, the U.S. economy is fundamentally strong — for
Federal Reserve Board Chairman Jerome Powell explains the Fed’s new patient policy.
With the shutdown ended, President Donald Trump’s erratic behavior isn’t killing us. For now. January was a month of bad economic news when there was any news at all (i.e. when data wasn’t delayed because of the government shutdown) — until Wednesday.
Then we found out from payroll processor ADP that private employers added 213,000 jobs this month. Hours later, the Federal Reserve, spooked enough by the tumult over the shutdown and the manifest nuttiness emanating from the White House and the shutdown, said it was out of the business of raising interest rates for a while.
And stocks zoomed, with the Dow Jones Industrial Average DJIA, -0.64% s rising 435 points and the Standard & Poor’s 500 SPX, +0.02% tacking on 1.6%.
Also read: How a dovish Fed sparked a stock-market rally and tanked the U.S. dollar
Has the Orange Combover morphed into Goldilocks? Hmmm.
More like, we’re getting a reminder that fundamentals matter more than politics. Right now, the fundamentals are still pretty good — the Congressional Budget Office estimates the shutdown cost the economy a modest $11 billion (it’s a $20 trillion a year economy), and $8 billion of it will be made up as federal workers get back pay. Employers are still hiring.
Not everything is perfect — there was a very weak report on existing-home sales from the National Association of Realtors, and business and consumer confidence surveys are weakening.
But with the shutdown ended, President Donald Trump’s erratic behavior isn’t killing us. For now.
So what happens next?
First, take the Fed’s easing off the brakes seriously. Inflation is so low, still, that the central doesn’t really have to raise interest rates — only 1.9% in core inflation the last 12 months, and oil and gasoline prices excluded from the core number have been falling recently after spiking higher earlier in 2018.
There’s more disinflation coming our way later this year, too, as new oil pipelines in Texas are completed, letting producers more freely move the Southwest’s fast-growing crude production to refineries in the rest of the country.
I was in Texas last weekend, where the first gas station I saw was charging $1.81 a gallon for regular, about 40 cents below the national average, because the pipeline shortage forces local producers to keep more of their crude in the region. While prices might not fall that much nationally when those locked-down supplies become available to more Americans, we’re going to get a dose of what people in the interior of the country are having ,and it will give the Fed the ability to wait before raising rates much (or any) more.
Obviously, the Fed going more slowly than had been expected is good for stocks.
“It sure looks like this Fed chair may believe in a triple not dual mandate: Maximum employment, stable inflation and a solid equity market,” independent economist Joel Naroff told clients.
Second, the next big way Trump can mess things up is by hiking tariffs on $250 billion of Chinese-made manufactured goods if the two nations don’t reach a revised trade deal by March.
As The Wall Street Journal reported, both sides are under pressure to make a deal — China, because its economic growth is slowing, and Trump because the ineptitude of his capitulation in the government shutdown, when he didn’t get the wall on the Mexican border he wanted.
Ego often trumps the president’s appreciation of his own self-interest, but his incentives are to play ball and take a less-than-radical deal with China. It keeps the markets calm, preserving more of the gains that bolster his taking credit for economic stewardship. And to put a none-too-fine point on it, he needs a stretch where he doesn’t look like a clown to all but his most-devoted followers.
But all of this really only gets the economy through the next few months.
After that, the market will depend on corporate earnings, which are coming in strong for the fourth quarter. Facebook FB, +11.32% and Apple AAPL, +0.22% beat estimates — Facebook trounced them — but estimates for the rest of the year, marketwide, are still declining, CFRA Research strategist Sam Stovall said.
So those strong fundamentals I mentioned a moment ago? We’re finally at the point in the expansion where the weakening is apparent on the horizon. It might fix before we get to the middle-to-late part of 2019, or it might not.
The Fed is “mindful that financial conditions have tightened, global growth is slowing, the outcome of ongoing trade disputes remains uncertain, as does the outcome of Brexit,” Regions Financial economist Richard Moody said. “What remains fairly subdued inflation gives the [Fed] the latitude to see how these issues resolve before deciding on the appropriate path of the fed funds rate going forward. This is clearly the appropriate stance to take at this time.”
On Friday, we get the January jobs report, and any big drop it may show in federal employment due to the shutdown is temporary.
But the declines we’re seeing in both consumer and business confidence, as well as housing sales, are the signs to watch.