Kristian Rouz — The US economy appears to have maintained momentum at the start of the year, despite the partial government shutdown affecting the purchasing power of some 800,000 furloughed federal employees. Changes in international trading patterns have driven a rebound in manufacturing, while overall GDP expansion is expected to modestly slow down in the first quarter of 2019.
This decline reflects the changes in confidence of surveyed consumers in relation to their own personal finance and their perception of overall economic conditions. The University of Michigan said consumers are now more inclined to save rather than spend their money, and these precautionary savings could affect the overall purchasing power.
Analysts said the decline in consumer sentiment happened due to several factors. These include the government shutdown and related economic concerns, as hundreds of thousands of households have seen their income fall in recent weeks.
Another reason is sharp volatility in the financial markets — most prominently, in stocks — in late December and early January. Amid Christmas holidays, US stock indices recorded a massive plunge, despite rebounding afterwards, stirring concern among private investors.
Additionally, seasonal factors have remained in play. After the strong household spending posted just ahead of and during the holidays, consumer sentiment tends to cool every year. Besides, harsh weather conditions across several regions typically hinder consumer spending as well.
But some economists point to the shutdown as the most important factor behind the University of Michigan's report.
"This report on consumer sentiment is the first concrete evidence that the economy is going to fall and fall hard if Washington does not end the shutdown," Chris Rupkey at the New York branch of MUFG said.
"It is going to be hard to see real GDP growth of more than 1 to 1-1/2 per cent in the first quarter if the consumer goes on a buying strike."
However, the majority of economists say the shutdown will only slash 0.25 per cent off the first quarter's GDP growth rate. According to a poll of 30 economists by Bloomberg News, that is the most likely figure, while economic growth for the entire 2019 could come in just 0.13 per cent lower due to the shutdown.
Experts say, despite the lacklustre report, US consumer sentiment still remains high. The same report also found the measure of current economic conditions dropped from 116.1 last month to 110.0 in January, while the measure of consumer expectations slumped to 78.3 from 87.0 over the same period, and is now at its lowest since October 2016.
Analysts say political tensions in Washington and alarming reports in the media might have made households more cautious. But some say this might be a return to normality, whilst the majority of macroeconomic indicators could still skyrocket as soon as the shutdown is over.
"Sentiment among both households and businesses has been coming off the sugar highs, which were caused by tax cut hopes at the beginning of the Trump presidency," Harm Bandholz at the New York branch of UniCredit said.
On the brighter side, US manufacturing activity has improved — against the odds of higher Fed interest rates and international trade turmoil. According to a separate report from the Federal Reserve, US factories expanded their output by 2.3 per cent year-on-year in the final quarter of 2018 (Q4), after a 3.7 per cent expansion in the previous quarter.
Economists say the Trump administration's efforts to lower taxes and adjust the rules of foreign trade and investment has resulted in many American manufacturers returning to the US, while foreign companies now have to move their facilities stateside.
These developments, in turn, have created new jobs, and contributed to the overall GDP growth — as manufacturing accounts for some 12 per cent of the US economy.
"While the manufacturing strength in December is a favourable signal for the economy, we should keep in mind that it came after soft results in earlier months," Daniel Silver of JPMorgan in New York said.
These reports suggest that despite dark clouds gathering over the robust economic growth in the US, political turmoil has so far failed to derail this expansionary cycle. Although the depth of shutdown's impact to the economy has yet to be properly assessed, most observers are confident of a solid rebound and ongoing acceleration in the months to come.