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Look Back at the January 14, 2019 week

The January 14 week included a few closely watched data reports and didn’t include a few others. However, what seemed to capture attention was comments from Fed officials that indicated that they are firmly lining up behind being “patient” and “data dependent” in regard to the outlook for monetary policy and that the present fed funds rate range of 2.25%-2.50% is near or at neutral. As such, expectations for further removal of interest rate accommodation have diminished. In any case, until the partial shutdown of the federal government is done and the damage to the economy can be properly assessed, it is unlikely the FOMC will adjust short-term rates again. Expectations that the FOMC will be on hold for the remainder of 2019 may not be exaggerated as there were already signs that 2019 was going to see slower economic growth than previously forecast.

With the shuttering of the Census Bureau and Bureau of Economic Analysis, more data reports were delayed. The first of the more critical data for December did not appear in the form of numbers on retail and food sales, and housing starts and building permits. Also delayed was the November data for business inventories. All of these would have contributed to shaping expectations for growth in the fourth quarter. The available data is pointing toward a loss of momentum in the first quarter 2019.

There were a few more looks at inflation in the week. The December Final Demand PPI on Tuesday and the Import Price Index on Wednesday were both more-or-less on expectations for lower month-to-month readings. Similar to the December CPI and as anticipated, it was weakness in energy commodities that restrained prices. The PPI was down 0.2% month-over-month but up 2.5% compared to a year-ago; the core was flat for the month and up 2.8% year-over-year. The Import Price Index was down 1.0% in December from November, held down by a 11.6% fall in petroleum. Compared to December 2017, the index was down 0.6% overall but up 1.0% excluding petroleum.

In combination with the inflation expectations measure in the University of Michigan Survey of Consumers which include January data, the FOMC should find inflation consumer expectations for inflation remain anchored. That is somewhat less true for businesses according to the Atlanta Fed’s Business Inflation Expectations for January which dipped fourth tenths to 2.0% from December. As long as the readings remain near the 2% symmetric objective, the Fed policymakers will probably view this as an unwinding of some of the price uncertainty associated with tariff policy.

The manufacturing conditions surveys for January from the New York and Philadelphia Feds on Tuesday and Thursday, respectively, were mixed. The New York Fed’s general conditions index dipped to 3.9 in January from 11.5 in December and was slower for a second month in a row. The Philadelphia index rose to 17.0 in January from 9.1 in the prior month, hinting that the slower conditions in the prior two months were changing course. However, both point to continued expansion. Even if the underlying pace of activity has moderated for the factory sector, it is not absent.

The December data on industrial production and capacity utilization for December on Friday indicated that manufacturing was solid (up 1.1%) even excluding the strong production for motor vehicles (up 0.7%). Mining also grew robustly (up 1.5%) as gas and oil extraction gained. In fact, it was only a drop in utilities output (down 6.3%) that restrained the total from ending 2018 with a flourish.

The January New York Fed Business Leaders Survey on Thursday said service sector activity was flat for January after 5.6 for December. The report doesn’t correlate too closely with the ISM Non-Manufacturing Index but it does suggest that the impasse about financing the federal government may have a negative impact for the service sector at the start of 2019, more so than manufacturing.

The preliminary Consumer Sentiment Index for January released on Friday was a harsh wake up call on just how deeply the shutdown may affect consumer spending in the first quarter 2019. The index fell 7.6 points to 90.7 and was the lowest since 90.0 in July 2016.

The Fed’s Beige Book released on Wednesday covered the period from late November through the first days of January. On the whole Fed Districts reported modest-to-moderate growth, but two of the 12 Districts were closer to neutral on their assessment of conditions. While by no means a weak report, it is the softest in just over two years. It suggests that the burst of confidence felt by the business community after the November 2016 election that was sustained by the tax package of December 2017 has now diminished.  District Bank survey respondents are now looking at an uncertain economic picture with less fiscal stimulus and more challenges in trade and tariffs.

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