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Weekly Update 9/29/2023: Government Shutdown Looms

Insights
  • Capitol Hill
  • Economic Releases

Capitol Hill

September 30 is the end of the fiscal year for the federal government. Given the situation in Congress, it is increasingly likely that a shutdown starting October 1 will occur. While the situation is fluid, we wanted to share the key points as they stand right now. According to the Federal Reserve, each week the government is shutdown, annualized real GDP is reduced by about 0.2 percentage points. Furloughed federal employees will be paid retroactively for the days they could not work. It is estimated that about 737,000 workers could be furloughed this time around. For investors, the key will be how long the shutdown lasts. The last shutdown ran from December 2018 through January 2019 and was the longest ever at 34 days. According to Bloomberg: “Key federal economic releases in October will include the jobs report, scheduled for publication Oct. 6; CPI (Oct. 12); retail sales (Oct. 17); and the PCE price index (Oct. 27). In addition, weekly jobless claims data are released each Thursday. All these releases, plus many more, could be delayed depending on how long the furlough lasts.”

With the next Federal Open Market Committee (FOMC) scheduled to release the result of their vote on November 1, not having data makes an already difficult, imprecise forecasting function even more challenging. The Fed, by the way, is not an appropriated agency (it does not depend upon Congress to approve its funds) so Fed governors and their staff will continue to work (and get paid) as normal. Unless another record shutdown occurs, by the time the FOMC meets, the government is likely to be up and running again, and the associated data uncertainty will be resolved. However, a lengthy shutdown cannot be completely ruled out which would potentially have an effect on the Fed’s talking points. The key issue is the cumulative effect of headwinds facing the economy from the ongoing UAW strike to the resumption of student loan repayments to higher prices at the pump. While Fed Chair Powell and colleagues have emphasized “higher for longer” when talking about rates, how long that actually lasts may need to be adjusted.

Economic Releases

The week was not heavy on economic data but it did include the Fed’s preferred measure of inflation released this morning. Earlier this week, the U.S. Census Bureau and Department of Housing and Urban Development released their housing metric which showed that new homes fell in August to a five-month low. Single-family home sales fell 8.7% to a 675,000 annualized pace following an upward revision to July’s data. That was the largest drop in nearly a year and well below the median estimate in a Bloomberg survey of economists which called for a 698,000 figure. Though builders are offering enticing incentives, it is not enough to offset the challenges coming from tight supply, elevated prices and high mortgage rates. The median sales price of a new home moved lower to $430,000, but that still remains above pre-pandemic levels. New home sales are tabulated when the contract to build is signed and is seen as a timelier barometer of the housing market than previously-owned homes which are calculated when the contract closes. With initial jobless claims set to accelerate in the coming weeks thanks to an expanding strike by the UAW and the aforementioned potential government shutdown, there is not a lot of forward momentum for the housing market to cling to as the industry approaches the yearly low point for transactions around the holiday season.

Most eyes were tuned to the personal income and personal spending report from the Bureau of Economic Analysis. Personal income rose 0.4% in August, up from a 0.2% gain in July, as an increase in average hours worked accounted for much of the increase. Personal consumption also rose 0.4% last month, down from a revised 0.9% in July, which was slightly below the 0.5% consensus figure. Spending on housing and gasoline purchases were the largest contributors to the services and goods categories, respectively. The personal savings rate was 3.9%, down a bit from the 4.1% recorded in July.

The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) data point, showed headline growth of 0.4% and 3.5% on an annual basis. Core PCE, which excludes the more volatile food and energy components and presents a steadier trend for economists to measure, was up 0.1% and 3.9% on an annual basis. These figures were good news for fans who want the Fed to make no further interest rate hikes because they show that inflation is slowing. Whether this trend constitutes “considerable progress” towards the 2% goal as Chairman Powell has stated as his requirement before easing can begin is another question. At the press conference following last week’s FOMC meeting, Powell stated: “We want to see that these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months.” The headline figure rose at the slowest monthly pace since late 2020 when the country and the world was still within the grips of the global pandemic. The challenge is that there are a lot of factors outside of the Fed’s control that affect inflation including the price of a barrel of oil (supply of goods), employer and labor force wage negotiations (supply of labor) and currencies (relative purchasing power). So, while there has been considerable progress, the “mission accomplished” banner cannot be hung just yet.

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