How much damage, if any, did the recent government shutdown inflict on the US economy? The answer will remain a mystery until we see how the macro trend looks in the post-shutdown data. That’s going to take at least a month or two as we wait for reliable numbers across the economic spectrum. Meantime, we can look to the financial markets and a handful of economic data points that have been published this week for clues on what to expect.
The good news is that moderate growth prevailed going into the shutdown, as this week’s update of the US Economic Profile suggests. The September numbers are still a work in progress, but based on what’s available so far it appears that the economy is still poised to expand for the near term. True, this week’s delayed release of the September payrolls data was weak in terms of the gain over August. But the year-over-year increase for private payrolls was still hugging the +2% mark, which is in line with what we’ve seen this year.
Yesterday’s weekly number on jobless claims fell less than economists predicted, leaving new filings for unemployment benefits at relatively elevated levels compared with the last six months. But it’s still unclear how much of this is noise due to computer glitches in some states in recent weeks. While we're waiting for more reliable numbers in the weeks ahead, it's worth pointing out that as long as weekly claims are moving lower, the trend doesn’t look threatening. On that note, it’s encouraging to see that seasonally adjusted claims fell roughly 6% last week vs. the year-earlier level. That’s a bit soft compared with recent history, but until or if we see claims rising on an annual basis, week after week, this leading indicator is still trending positive in terms of providing a clue for the broad macro outlook.
As for the stock market, the bulls continue to push prices higher. The S&P 500’s gain yesterday leaves the index ahead so far this year by nearly 25%. That's a bit frothy, but for what it's worth the crowd is inclined to think positively. Meanwhile, the spread in corporate bonds over Treasuries continues to inch lower, which suggests that there’s minimal worry in the fixed-income market in assessing the economic outlook. For instance, the BofA Merrill Lynch Option-Adjusted Spread of roughly 4.44% on October 23 was near the lowest level since the Great Recession ended in June 2009. If the business cycle starts to show signs of stress, it's likely that this spread will post a sustained rise.
Meanwhile, the Federal Reserve continues to keep short-term interest rates low and few analysts think that’s going to change anytime soon. Over at Tim Duy’s Fed Watch, for instance, we’re told that “the September employment report further cemented the idea that March is the next opportunity for any change to the asset purchase program.” The economy may be strong enough to sidestep a new recession at the moment, but it’s not strong enough to convince the central bank to engage in tightening monetary policy.
But not all the numbers look encouraging. Yesterday’s update on the state of manufacturing for this month via Markit Economics suggests that this cyclically sensitive sector is slowing. “The US manufacturing sector grew at its weakest pace for a year in October, according to the Markit Flash U.S. Manufacturing Purchasing Managers’ Index,” advised the press release (pdf). Is this a sign of trouble ahead? It’s too soon to say, although it’ll be interesting to see if next week's October update of the widely followed ISM Manufacturing Index confirms the downshift in the PMI data.
Speaking of next week, we’ll see the delayed September reports on industrial production and retail sales, which will provide additional context for evaluating the economic trend going into the government shutdown. But deciding how the macro profile emerged from the political insanity will remain open for debate for some time. Some analysts say we’re headed for a rough patch or worse. They may be right, or not. Based on the numbers so far, there’s still no smoking gun for claiming that the cyclical jig is up. Maybe that analysis will change as fresh data rolls in. If it does, or doesn’t, you’ll read about it here.