At the risk of harping too much on the issue of a government shutdown tomorrow at midnight, here is a brief update on where we stand. On Tuesday night, House Republican leaders decided to go ahead with a funding plan (continuing resolution) to keep the government funded until February 16 – which would mark the fourth CR in the last six months.
Republican leaders seem confident they can get the votes to pass the new CR without any Democratic support, but members of the GOP House Freedom Caucus are not happy. They want more defense spending in the new CR. If some of those members decide not to vote for it, then a shutdown becomes very likely. The House vote is scheduled for later today, but that remains to be seen.
While negotiations on a longer-term spending bill are ongoing, Democrats have dug in their heels and demanded that no new budget deal be agreed to until there is a deal on the Deferred Action for Childhood Arrivals (DACA) program, which expires on March 5. Democrats have said they want assurances that DACA recipients are protected from deportation before agreeing to a longer-term spending bill – they believe that’s the best leverage they have.
In a government shutdown, most federal agencies would close and hundreds of thousands of government workers would be furloughed. But not every part of the government would close. Read which agencies close and those that don’t.
Despite shutdown worries, stocks remain on a tear. The Dow clocked a 322-point advance yesterday alone. Stock market optimism among professional investors has soared to its highest level in 32 years. The last time sentiment among professional traders reached this level was the year before the Black Monday crash that sent the Dow down 22% in a single day in 1987.
While I’m not predicting another Black Monday, I think it’s fair to say that stocks have entered the “euphoria phase” – which typically marks the final stage of a long upward climb for equities. Of course, no one knows how long the euphoria phase will last.
On the economy, more and more forecasters and analysts are revising their 4Q estimates higher as it is looking like GDP topped 3% (annual rate) in the final three months of last year, marking the third consecutive quarter of 3+% growth. We won’t see the Commerce Department’s first estimate of 4Q GDP until near the end of this month.
Retail sales posted another solid gain in December, up 0.4% and were up 5.4% for the 12 months ended December, as compared to only 3.2% in 2016. Retail sales figures for November were revised higher to a monthly gain of 0.9%. Most forecasters expect we’ll see continued strong retail sales this year, in part due to the tax cuts passed just before Christmas.
Speaking of the tax cuts, Apple announced yesterday that it will make a “$350 billion contribution” to the US economy and create 20,000 new jobs over the next five years. Apple said it will spend over $30 billion in capital expenditures over the same period. This implies the company will repatriate virtually all of its at least $250 billion in profits held overseas.
In other economic news, the Fed reported yesterday that US factory output rose for a fourth straight month in December. Factory output rose at a 7% annual rate in the 4Q, the strongest since the 2Q of 2010.That underscored a resurgence in manufacturing that’s primed for further advances.
With all the strong economic news of late, concerns about rising inflation this year are starting to grow. According to the Labor Department, the Consumer Price Index (CPI) rose 2.1% in 2017. Core CPI (minus food and energy) rose by 1.8% last year. So, inflation remains tame by these metrics.
Nevertheless, with the economy strengthening, it is widely expected that the Fed will raise short-term interest rates another three times in 2018, if not four. The next Fed Open Market Committee (FOMC) meeting on monetary policy will be on January 30-31, but an interest rate hike is not expected at that meeting.
The next Fed Funds rate hike is widely expected at the March 20-21 FOMC meeting after the new Fed Chairman Jerome Powell is presiding. It is then that the Fed Funds rate is expected to be lifted another 0.25% to a range of 1.50% to 1.75%.
I’ll leave it there for today. Hope you’re staying warm! We’ve had record lows in Texas this week, with freezing rain and ice. Austin was basically shut down on Tuesday.