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Look Back: Week of December 24, 2018

The economic data in the December 24 week offered little post-Christmas cheer against the backdrop of the volatility in the stock market and partial shutdown of the federal government. Markets plunged in the prior week as President Trump pulled back from a deal that would have kept the government open until February and rumors emerged he was exploring firing Fed Chair Powell. Market disappointment at the FOMC’s well anticipated decision to raise rates added another element. However, a reassuring – if late – statement out of the White House on Monday that Powell’s job was safe helped the equity market rally on Wednesday after markets reopened following the holiday.

Congress did not return to session until Thursday, so the shutdown remained in place. At this writing there is little sign of movement in negotiations as both parties dig in their heels. With another long holiday weekend nearing, the earliest a resolution is likely to be found is after January 3.

Two economic data reports were delayed. The Census Bureau’s New Single-Family Home Sales for November and the advance report on international trade in goods, retail inventories, and wholesale inventories. Data out of the Labor Department came under the essential services category, so has not suffered any delays. Private data sources and the Federal Reserve are not affected.

The sparse data calendar offered a final look at the monthly numbers on consumer confidence. The Conference Board’s Consumer Confidence Index for December put its preliminary read at 128.1, down 8.3 points from 136.4 in November. Stock market losses and the prospect of a government shutdown probably played a part in the survey result (survey closed December 14) and more than offset consumer positives like a strong labor market and lower gasoline prices. However, the steep drop does not change that high levels of confidence persist. If the gloss is off the string of four exceptional readings in the August-November period, these are still very good numbers.

There were more hints that the economy will turn in a softer performance in the fourth quarter 2018 and carry less momentum going into 2019. Regional surveys for both the manufacturing and service sectors pointed to less hectic expansion – sharply in the case of manufacturing and more mildly for services. It appears that synchronized global expansion has given way to uneven and less vigorous growth and thus for export orders, and that domestically the effect of fiscal stimulus has faded along with greater risks via trade and tariff policy.

The decline in the Richmond Fed Manufacturing Composite Index to -8 in December from 14 in November – although among the most severe decreases – is emblematic of the situation facing the factory sector as it tries to do year-end planning against the uncertainties of slower growth at home and abroad, the vagaries of uncertainty related to trade, supply chains, and pricing, and how best to address payroll size and costs in a tight labor market. The service sector has similar challenges.

Initial jobless claims for the week ended December 22 were little changed at 216,000 from 217,000 in the prior week. Levels have returned to historic lows after the natural disaster-related noise in October and November. Layoff activity is simply less this year as businesses continued to try to keep up with demand.

Without the data on new single-family home sales in November, the only other housing market reports were the S&P CoreLogic Case-Shiller Home Price Index and the FHFA House Price Index for October, and the NAR Pending Home Sales Index for November. All were consistent with conditions that point to a less vibrant housing market. Home prices continue to rise, but at a slower pace. Home purchases reflect that buyers have more power to negotiate prices and that higher mortgage interest rates are impacting perceptions of home affordability. The dip in mortgage rates in November may have encouraged some fence-sitters to enter the market since the data was collected, but even a small increase could keep cautious buyers from committing to a home purchase.

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