The Finance 202: Government shutdown threatens to take real bite out of economic growth

But the knock-on effects — when government contractors or others who rely on federal workers as customers get stiffed, then fail to pay employees or creditors and, potentially, see their businesses fail — are hard to measure, Pantheon Macroeconomics chief economist Ian Shepherdson argued in a research note over the weekend. “Even a one-month shutdown would seriously hit growth, to say nothing of the misery caused,” he wrote. And if the situation drags on for the duration of the first quarter, “we would look for an outright decline in first quarter GDP.”

The partial shutdown could also end the country’s 99-month streak of continuous job growth, the longest such stretch since 1939. “The January employment number could be pretty ugly,” Moody’s Analytics economist Ryan Sweet tells the Wall Street Journal’s Eric Morath.

Deutsche Bank analysts are more sanguine, writing over the weekend the shutdown will do “minimal” harm if it ends soon and waving off any major impact to the January jobs report. 

But they do see more concentrated pockets of pain, noting for example that jobless claims in Washington, D.C., over the past three weeks have leaped to their highest levels in more than six years. The statistic points to the most immediate victims of the government funding quagmire: those 800,000 federal workers who missed a paycheck on Friday. As MSNBC’s Ali Velshi notes, a growing number of companies are scrambling to arrange contingencies for customers who could miss payments: 

“At the aggregate level, the economy generally does not reflect much damage from a shutdown,” Federal Reserve chairman Jay Powell said during in an interview hosted by The Economic Club of Washington last week. “A longer shutdown is something we haven’t had. If we have an extended shutdown, then I do think that would show up in the data pretty clearly.”

But the GDP measure itself, and a number of other key economic indicators from the Commerce Department and beyond, are also on-hold as long as the shutdown persists. That is forcing the Fed — as well as investors — to fly partially blind. Reports detailing retail sales and housing starts due out this week, for example, likely won’t be released, High Frequency Economics chief economist Jim O'Sullivan notes. 

The shutdown has also thrown a wrench into Wall Street deals, "threatening to delay initial public offerings and takeovers that require national security clearance or approval from competition watchdogs," the FT's Eric Platt, Nicole Bullock, and Shannon Bond report: 

"National security reviews of acquisitions conducted by the Committee on Foreign Investment in the US, the powerful inter-agency group in Washington that vets takeovers, have been suspended. At the same time the Federal Trade Commission, Department of Justice and Securities and Exchange Commission have sent home thousands of employees," they write. "Bankers and lawyers are warning that the skeleton crews left in place could slow antitrust reviews and push companies to delay planned IPOs. The SEC has stopped examining proxy and registration statements, and its staff will not provide interpretive advice to companies or dealmakers seeking feedback on regulatory filings."

While there is no evidence that President Trump is ready to bend in his demand for border wall funding, pressure looks to be building on Senate Republicans to forge a deal. White House ally Sen. Lindsey O. Graham (R-S.C.) on Sunday recommended Trump agree to reopen the government while continuing to negotiate.

But Trump and Congressional Democrats “remained far apart Sunday,” The Washington Post’s Felicia Sonmez and Cat Zakrzewski write. “Tweeting from the White House as the capital was blanketed by snow for the first time this year, Trump continued to point the finger at Democrats, who he said were ‘everywhere but Washington as people await their pay.’” 

— Most Americans blame Trump, GOP for shutdown. The Post's Scott Clement and Dan Balz: "By a wide margin, more Americans blame President Trump and Republicans in Congress than congressional Democrats for the now record-breaking government shutdown, and most reject the president’s assertion that there is an illegal-immigration crisis on the southern border, according to a Washington Post-ABC News poll.

"Support for building a wall on the border, which is the principal sticking point in the stalemate between the president and Democrats, has increased over the past year. Today, 42 percent say they support a wall, up from 34 percent last January. A slight majority of Americans (54 percent) oppose the idea, down from 63 percent a year ago. The increase in support is sharpest among Republicans, whose backing for Trump’s long-standing campaign promise jumped 16 points in the past year, from 71 percent to 87 percent."

— The biggest U.S. corporations are losing momentum. WSJ's Akane Otani: "The U.S.’s biggest public companies are warning that their earnings may not be as strong as they hoped this year, intensifying pressure on a bull market that has struggled to regain its footing. Firms in the S&P 500 were projected back in September to report fourth-quarter earnings growth of 17% from the year earlier.

"But dimmer expectations for global growth and disappointing holiday sales have forced many companies to slash their forecasts, pushing the estimated earnings-growth rate for the quarter closer to 11%, according to FactSet. The drop-off in estimates—the steepest since 2017—is the latest sign that U.S. corporations, from retailers and airlines to phone makers, are losing momentum after several quarters of standout growth. The wobbling stock market reflects anxieties about how swiftly firms have been lowering their forecasts."

— Big banks also bracing. WSJ's Michael Rapoport: "The earnings outlook is about to get dicier for big banks. The 2017 tax overhaul was a boon. The reduction in the corporate tax rate sent billions of additional dollars flowing to banks’ bottom lines, helping earnings grow sharply. But fourth-quarter results, due to start this week, will mark the last period in which the new law’s drop in the rate to 21% from 35% magnifies earnings growth....

"And while Wall Street estimates suggest most big banks will announce solid results, growth will be muddled because year-ago results were hit by big special charges many banks took related to the tax-law changes. Come April and first-quarter earnings, banks for the first time will be measuring growth against a period when the lower tax rate had taken effect. The result: Banks’ 2019 earnings growth won’t likely be as robust as in 2018."

— Most traders are high on emerging markets — for now. Bloomberg's Netty Idayu Ismail and co.: "It’s a measure of how the climate has changed so quickly for emerging markets that this week’s interest-rate decision in Turkey, an event that would have had traders on tenterhooks six months ago, is being anticipated with a virtual shrug...

"True, the next development in the trade talks or a flurry of negative economic indicators from China could change everything. But for now the Federal Reserve’s more dovish tone — and central bank largess in general — combined with falling volatility, relatively low valuations and rising commodity prices are keeping most investors positive."

— Brexit on the brink. Bloomberg's Andrew Atkinson: "Theresa May is launching a last-ditch attempt to save her Brexit deal, warning euro-skeptics who are plotting to kill her plan that Britain is more likely to stay in the European Union than leave without an agreement. As she enters one of the most tumultuous weeks of her turbulent premiership, the prime minister will seek to avert what is almost certain to be a huge defeat on Tuesday in a House of Commons vote on the agreement she’s negotiated with the EU.

"In a speech on Monday, May will warn there’s now more chance of members of Parliament blocking Brexit than of the no-deal outcome preferred by many euroskeptic Tories who want a clean break from the EU. Thwarting Brexit would be a betrayal of millions of voters who opted to leave the bloc in 2016, she will say."

What Amazon’s Rise to No. 1 Says About the Stock Market (WSJ)

TRADE FLY-AROUND:

— Chinese exports hit the skids. Daniel Shane of CNN Business: "China's huge export industry just suffered its worst month in two years but still managed to rack up a record trade surplus with the United States in 2018 despite new tariffs. The value of goods shipped from China to the rest of the world fell by more than 4% in December, compared to the same period a year ago, Chinese government data published Monday showed. That represents the worst monthly performance for China's export sector in more than two years, and the first year-on-year decline since March 2018. Economists polled by Reuters had forecast that exports from China would rise slightly in December."

— Top Dem tells Trump to stay tough on China. FT's James Politi: "A senior Democratic lawmaker has warned the Trump administration not to settle 'easy one-off transactions' with China amid mounting signs that the US president is prepared to strike a deal with Xi Jinping by early March that would avoid a new escalation in tariffs. Richard Neal, the chairman of the House Ways and Means committee, which has oversight over US trade policy, told the Financial Times that US-China policy had to be 'in the best interests' of America 'today and for the future'.  'USTR has an obligation to look beyond the political pressures of the moment and the easy, one-off transactions, and secure real and lasting change to China’s anti-competitive behaviour,' Mr Neal, a Massachusetts Democrat, said in a statement."

The list of countries with espionage fears about China’s Huawei is growing — fast (Adam Taylor)

MELTDOWN WATCH: 

• "Trump’s border wall battle could soon give way to bigger fights with Democrats over Russia and impeachment." The Post's Greg Jaffe. 
• "Trump confronts the prospect of a ‘nonstop political war’ for survival." NYT's Peter Baker. 
• "Trump has concealed details of his face-to-face encounters with Putin from senior officials in administration." The Post's Greg Miller. 
• "Why the FBI might’ve thought Trump could be working for Russia." The Post's Aaron Blake. 

Anthony Scaramucci joins ‘Celebrity Big Brother’ cast (NY Post)

— The Detroit auto recession. Bloomberg's Keith Naughton , David Welch , and Gabrielle Coppola: "These should be boom times for Detroit. Unemployment is at a half-century low, gasoline is cheap and auto sales in the U.S. were near record levels last year. Yet American automakers are  closing factories, cutting  shifts and laying off  thousands of workers. The industry is behaving like a recession has arrived. In one segment of the market, it has.

"Detroit is in the grips of a car recession marked by the collapse of demand for traditional sedans, which accounted for half the market just six years ago. Buyers have made a mass exodus out of classic family cars and into sport utility vehicles. Familiar sedan models such as the Honda Accord and the Ford Fusion made up a record low 30 percent of U.S. sales in 2018, and things will only get worse."

— PG&E exploring bankruptcy financing. Mike Spector and Liana B. Baker at Reuters: "PG&E Corp is in discussions with investment banks about a multibillion-dollar financing package to help navigate bankruptcy proceedings, a sign that Chapter 11 filing preparations are intensifying in the wake of potentially staggering liabilities from deadly wildfires ...

"The California utility owner is in touch with large banks about so-called debtor-in-possession financing that could total between $3 billion and $5 billion, though the exact figure remains in flux and could end up being higher ... The company may alert employees as soon as Monday about its preparations for a potential bankruptcy filing in compliance with a state law about providing notice at least 15 days before such an event, one of the people said."

Malaysia Blames Goldman Sachs for Stolen Billions (NYT)

Capitalism’s tough love: The real lessons from the fall of Sears and GE (Robert J. Samuelson)

Tax Cut Is Better (for Companies) and Worse (for Everyone Else) (Stephen Gandel | Bloomberg)

COMING SOON: 

• The Brookings Institution hosts a discussion to explore how China and the U.S. are advancing artificial intelligence on Monday in Washington. 
• The Bipartisan Policy Center hosts a discussion of the book "A Bright Future: How Some Countries Have Solved Climate Change and the Rest Can Follow" in Washington on Monday in Washington.
• The Heritage Foundation hosts an event on "the constitution and economic freedom" on Tuesday in Washington. 

— From The New Yorker's Trevor Spaulding

Timelapse: Watch snow blow into D.C. from the roof of The Washington Post

'Lucky pup' rescued from freezing pond near Denver

When you have stage IV cancer, the shutdown is about more than a missed paycheck