Januarys are always pretty tough, but last month felt punitive at times.
The surreal weather, the blown pass interference calls, the government shutdowns, the fences, the walls… it was enough to make one pine for the days when the biggest post-holiday stress inducers were photos of celebrities in their bathing suits at Nevis.
Feeling the need for some clarity at the end of the month, I tuned into Dun & Bradstreet’s Economic Health Tracker presentation led by Adam Morehouse, senior economist, Dun & Bradstreet. To sum things up, the U.S. economy is facing some headwinds for certain, but things aren’t so bad. What’s a little strange is the numbers on household sentiment. As Morehouse put it: “The widening spread between existing and future sentiment is concerning. This is at the pre-global financial crisis level and the pre-dot.com bubble level.”
There’s really not much at all in the current numbers to explain such pessimism, so it’s hard not to think that the steady stream of fun-and-games coming out of Washington D.C. is playing a role here. The good news is that’s correctible, but perhaps not in the near term.
Other takeaways are the salutary effects of last year’s tax cut for corporations seem to be mostly confined to last year; many consumers, on the other hand, will be boosted by this year’s tax season; and the Fed’s recent decision to slow-walk future rate increases looks to be a healthy response to current sluggishness, particularly in housing.
Some data points and analysis:
• Real GDP growth is expected to slow this year from 2.9 percent to 2.5 percent: Meanwhile personal consumption, the largest contributor (69 percent of GDP) to overall growth, is also expected to slow to 2.7 percent this year, down from 2.9 percent in 2018.
• Overall Business Health Index (OBHI), which looks at the financial and balance sheet health of U.S. businesses, is declining: A lot of movement to the downside has taken place in recent months. Last month, the OBHI declined to a 40-month low, the lowest point since June 2015. It fell another 0.1 percent in January. “If we take a cumulative viewpoint of all the recent moves downward, the reversal of the trend after the index peaked in April of 2018, we have moved from slight caution expressed a few months ago to greater caution,” said Morehouse. The likelihood of businesses paying in a severely delinquent manner, missing a first payment or becoming no longer viable, has increased markedly.
• Shutdown’s toll: Out of six major industries that D&B tracks, all with the exception of retail are below their normal one-year average change and all are below the prior month’s change. “The effects from the furloughed workers will go beyond the labor market,” said Morehouse. “We will likely see a shuffling in discretionary spending, but to what extent and how much is still uncertain.” Similar in extent to a natural disaster occurring, a shifting of lost economic activity will occur in later quarters. Relative to total GDP, a permanent loss of $3 billion in an $18.7 trillion economy is inconsequential, but, “the material risk can come from repeat occurrences of partial shutdowns and losses can certainly add up, and that risk appears to be growing as the dysfunctional government at the federal level continues,” Morehouse added.
• Growth drivers and detractors in 2019: Various forms of compensation, be it weekly hourly earnings or total compensation including employee benefits, accelerated at the end of 2018, with annual private sector hourly earnings accelerating more than 3 percent in Q4 2018 for the first time since the start of the global financial crisis. We also saw the unemployment rate falling to a 49-year low in November before ticking slightly higher at the end of the year as a greater number of people entered the labor force and the labor force participation rate moved higher.
• Downside risks: These include a trade war with China and the possibility of another government shutdown. “The longer the trade war lasts and if it ramps up in severity, the great price distortions will be for consumers in both China and the U.S.,” said Morehouse. “The adjusting costs for existing tariffs have already been felt by some U.S. companies and that will filter through to consumers in 2019 by way of higher prices. The chances of another government shutdown will make planning difficult. Since this past shutdown was the longest in U.S. history, with the threat of another shutdown on the horizon, we believe that those consumers affected will be more skittish in terms of spending.”