Popular Economics Weekly
How do we reconcile the fact that industrial production in 2018 was very good, probably due to producers stocking up before more new tariffs are announced, and consumer sentiment has plunged to a 2-year low because of the government shutdown?
A surge in motor vehicle production together with construction supplies along with a strong gain for business equipment caused a 1.1 percent December increase in manufacturing production that far surpasses Econoday’s consensus range where the top estimate was only 0.4 percent.
Consumers power most economic activity with their spending, so when they grow worried about future prospects, spending and economic growth slow down. Hence the reduced growth expectations in 2019, as there is a growing consensus that a prolonged government shutdown will begin to harm large and small businesses.
Trump’s chief economic advisor Kevin Hasselt reports the shutdown has cost $1.2 billion in economic activity per week in just the first three weeks of 2019, and could cost much more if the shutdown continues.
In what is the first major economic indication of trouble tied to the government shutdown, the consumer sentiment index plunged to a 90.7 reading that is far below consensus estimates of 95.5. The expectations component fell nearly 9 points to 78.3 with current conditions also taking a hit, down more than 6 points to 110.0.
Richard Curtin, chief economist of the U. of Michigan sentiment survey, reported “Consumer sentiment declined in early January to its lowest level since Trump was elected. The decline was primarily focused on prospects for the domestic economy, with the year-ahead outlook for the national economy judged the worst since mid-2014. The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies. Aside from the direct economic impact from these various issues on the economy, the indirect effect meant that half of all consumers believed that these events would have a negative impact on Trump's ability to focus on economic growth."
Another casualty of the shutdown was that some government statistics, such as retail sales, haven’t reported for December. December sales are expected to be healthy, but then we have the usual January letdown as consumers retrench while waiting for their tax refunds that may also be delayed because of the shutdown.
So consumers are beginning to recognize the record shutdown length is affecting this year’s economic prospects,. And we shouldn’t forget what happened the last time higher tariffs were enacted. It was just prior to the 1929 stock market plunge. The Smoot-Hawley Tariff Act of 1930 raised import tariffs by an average 20 percent, which helped to turn it into the Great Depression.
Are we about to repeat that history?
Harlan Green © 2019
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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