January 2019 Recap: The wall! The government shutdown! Trump! Pelosi! McConnell!

The markets begin 2019 with a “stealth recovery” as all of the major indicators recorded positive increases. What’s driving the advance over the past three to four weeks? It doesn’t seem to be corporate earnings, which have been mixed for the companies that have reported so far. Projected earnings gains for the coming year are expected to show a growth rate of mid to high single-digits, compared with average gains last year of over 20%.

The gains have also come in the face of the longest government shutdown in our history. The shutdown was eating into 1Q GDP growth at the rate of 0.1% each week, according to some analysts. My guess is that the markets are finally coming to realize that they front-loaded the benefits of the 2017 tax bill, which are now beginning to fade. Those gains will pretty much be exhausted by 2020. Averaging the results for 2018 and 2019 might be the best way to handle the situation.

The wall! The government shutdown! Trump! Pelosi! McConnell! So many things to think about and to worry about. Do they have an impact on the U. S. economy or don’t they? It’s becoming more obvious that they do matter and that the general dysfunction in Washington, DC, is starting to infect the rest of the country. Quite a few years back, I heard Bill Seidman, an economist and then head of the FDIC, wittily introduce himself at a banking conference. He said, “I’m Bill Seidman, and I’m from Washington, DC. That’s 37 square miles surrounded by reality!” Everyone chuckled, but it’s becoming more obvious each day that he was on to something.

The government shutdown was a harsh reality for the 800,000 or so federal workers who didn’t received a paycheck and became more of a problem for millions of others whose jobs are interconnected with the U.S. government in some way or another.

Analysts are scrambling to figure out what the impact will be on the nation’s GDP for the first quarter of 2019. Some have predicted that each week of the shutdown will subtract a tenth of a percentage point from the nation’s overall output. A few extremists have even projected a flat or negative GDP for the quarter if the shutdown continues for another couple of months.

The economic impact of the shutdown obviously has to be weighing on the minds of the Federal Reserve and its FOMC Committee. My guess is that they will push back any short-term interest rate increases until at least late 2019, in order to offset the damage done to the economy from the shutdown. If the Fed doesn’t raise rates in 2019 it will likely give a boost to stock prices, and even bond prices as well.

How will the shutdown impact the monthly jobs numbers and the nation’s unemployment rate? No one knows for sure, and even some of the government agencies responsible for the data have been shut down. As economists are entering into relatively uncharted territory.

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