Thu, 10 Oct 2013
Many of the effects from the shutdown haven't even touched the economy yet, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
With the government shut down, so has the flow of government data, economic data. But it doesn't mean we can't say anything about the economy right now. Here to offer his insights on what we do know based on some recent [private-sector] data is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: There is some data that you can look at. You are still coming to work over the last week. But before we talk about some of the data that we do have, let's first talk about the data that we don't have, and how that's especially a big problem for the Fed right now.
Johnson: In all of their statements, the big thing that [the Federal Reserve] said is, this is data driven--we'll take it as it comes, and we'll get the data, and we'll react to it, and that's how we're going to decide when to taper our bond purchases. And we're especially going to watch the unemployment rate, and we're especially going to watch some of the job market data.
Well, lo and behold, that's some of the data where the holes are going to be the biggest [due to the shutdown].
Stipp: Essentially what they want to do is, if they see signs of economic improvement, they may begin to taper a little bit sooner. They'd recently decided that they weren't going to taper, even though we thought they were for a long time.
Do you think that given the fact we won't be seeing that data probably means status quo on their current bond-buying purchases, at least for the short term?
Johnson: I think they can't do anything but that. I think the … outside data isn't particularly good or particularly bad, and I think that they'll probably have to hold steady until we resolve this thing, and then hope that the data they do get is halfway decent.
Stipp: Let's talk about the job report, because that's a big, important one, as you said, that they are looking at, and we didn't get the job report because of the shutdown last week. Will we get that data eventually, and how might we get it when we do?
Johnson: There are a couple of things that could happen. Some of the actual survey data for the establishment report may come in, but they may have difficulty processing it. I don't know exactly what days it got mailed out, and so it's not entirely a collection issue. They may just not have sent the stuff out at the same time as usual, and that will confuse some of the data.
The bigger problem is the unemployment rate, which is the thing that the government said they really wanted to watch, because that's done by a survey, which asks, what were you doing yesterday, or what were you doing last week? And it's [asking about] something in the very visible past: Are you sure you worked one day of that period between here and there, and got paid for it?
Now … they can't, obviously, do the survey. They can't make the phone call. There's nobody to make them [right now], and so they'll have to make the phone call [later] and ask, did you work two weeks ago last Tuesday or not? They're going to have to ask it for some further-back period of time, and that's certainly going to diminish the value and the comparability of the data, because remember, this number doesn't move much. It moves hundreds of thousands on a million and million base.
Stipp: The data could be fuzzier.
Are you saying that they have probably collected the data for the September report, but just haven't analyzed it yet, because of the shutdown, but now where they would be collecting the data for the October report, they don't have staff, if the shutdown continues?
Stipp: We do have some data, though, on employment, and we talked about this last week, the ADP data, and it pretty much shows that the job market is still stuck in this very slow growth rut.
Stipp: Do you think that we can infer from ADP that we're still steady-state, or do you think that there may be some weakening in the job market here, especially given that we have all these government employees who aren't working?
Johnson: That's going to mess up the data too, because how exactly that's going to get counted in the data is going to be unknown. If they don't work during a certain period of time in a given two-week period, then it doesn't count, and whether or not they get back pay goes into discussion. So it's going to be very, very difficult to interpret the employment numbers.
The one number that I suppose might be a little better is, eventually they go … to look at tax data--who submitted FICA tax withdrawals for how many number of people--and that's how they eventually true-up the [employment] data from a survey of a select number of businesses to the whole economy with some great deal of accuracy--by going back to payroll data.
We'll eventually get the establishment side of the data. It's going to be too far past the fact to do us much good in the short run, but the data will be there, and we'll have a decent series eventually. The unemployment data is a whole different story because of the survey nature of that. That data is probably messed up forever and gone.
Stipp: The shutdown is certainly wreaking havoc with the employment data, at least some parts of it.
Let's talk about data that we do have. Retail sales, which is important to a lot of areas of the economy: You're still getting some data there from the weekly shopping center report, but maybe not everything you'd like to see.
Johnson: The weekly shopping center data is decent for shopping centers, but it doesn't include things like restaurants and the services part of the economy, which is far bigger than what we get off the shelf. So it's not going to help us predict consumption all that well, either. So that's a problem, and I think that's going to be an issue. But the weekly shopping center data so far is the same old stuck in neutral, just a little bit over 2%, certainly near the weakest of the year. So not wonderful even going into this situation.
Stipp: If [consumers] aren't going to the mall, are they buying autos? Because we also have private auto data. We get government auto data, but Automotive News also releases that data. Were you seeing anything better there?
Johnson: The news there was mixed, because the number dropped from 16.1 million units in August to 15.3 million in September, which is a pretty fair sized drop. But the issue is, and why I like the government data, the government data adjusts for the number of selling days and for some seasonality, and makes the numbers a little bit more comparable--because some very weird things happened in September. There were fewer weekends. The actual day of Labor Day, even though it's the first Monday of September, by industry agreement got counted in the August sales figure. So you really have to average those two numbers out a little bit. But still the auto segment doesn't appear to be taking off on a new boom after the data, and it looks like the really great number for August was a little bit suspect.
Stipp: Housing data we still get from some private, non-government agencies. What's your take on the data that you were able to see from them?
Johnson: The housing data from the National Association of Realtors is the existing home sales, which were relatively good. You saw pending home sales, which looked terrible. That's from the realtors. Then we also get builder sentiment, which has been a little bit too optimistic lately, and from that you can usually do a decent job of inferring housing starts, which we won't get.
The other piece of data that I'm really worried about and wondering what they're going to do is the inflation data. It's not only an important economic metric to me, but it's used to set a lot of pay scales, it's used to set what your Social Security payments are going to be. It sets the federal bond payments on TIPS (the Treasury inflation-adjusted securities), and I don't know how they're going to do without those numbers. I understand that the number is delayed, but I can't believe that that isn't an essential number, and it's really going to mess things up. I believe we're approaching a period now that it's the number they actually need for the semiannual interest rate calculation on savings bonds, so I don't know what they'll do.
Stipp: The shutdown is certainly messing up a lot of the data issuance, but what about the actual fundamental economy? It looks like some of the data we do have suggest, at best, a continuation of this slow growth, but there is also some other signs of concern in some of the data that we have. So the fact, now, that we have this shutdown, we also have this debt ceiling probably impacting decision-making, confidence in the business community. Do you think besides maybe being in a soft patch anyway that we're, making the situation worse with all of this continued indecision and gridlock in Washington?
Johnson: I absolutely think it will, and I think it's a bigger issue than most people realize. I've talked about the economy slowing, about the retail sales numbers being a lot slower than I had hoped for a long time. Overly optimistic sentiment surveys, while the hard data on production was a little weaker, are all issues. I think that the economy will slow even a little bit more.
People are saying, oh, well, we've survived these last couple of weeks OK, and that's probably true. But this is not the period where you'd see it. The first paycheck [for furloughed government workers] that will be impacted will be the one that's issued Oct. 11 by the government, and that will still include some part of September that they will get paid for. After we're past that date, I think that's the thing that becomes critical. If they haven't made the deal on back pay and on the whole issue of the debt limit and the government shutdown by Oct. 11, that's when things will start to bite, and then two weeks later, it becomes an even bigger deal.
Stipp: I want to talk, again, about the debt ceiling. We've touched on this before. We have seen some arguments from lots of different areas that say the Treasury actually would be able to continue to make those [interest] payments even if we hit the debt ceiling, because they could just defer money from other things. In your mind, that Oct. 17 date, the debt ceiling limit, how big of a deal is it as far as the operations and what the economy might see and what the market might do? Some folks are saying, well, maybe it won't be as big of a deal, because the Treasury can still continue to pay those debts.
Johnson: I think that's absurd. I really think it's a huge deal, and I've talked many times about that the government will only have sufficient funds to pay about two-thirds of its bills, and then somebody is going to have to triage that. I don't know if there are even enough workers in the government right now to triage and decide which bills to pay and which ones not. It's just a mess of who is going to try to decide that. It's going to scare people even further about who gets paid. To markets around the world, we'll look like a banana republic if we're sitting here debating whether or not we're going to pay our bills on time, like it's some kind of choice.
That's certainly one thing that causes people to rate bonds down and to increase the required rate of interest. The last thing we need now is higher interest rates. That's what the Fed has been fighting for, to keep them down, and to offset that by saying the budget debt limit is no big deal, we can kind of mess around with accounts and do things here, that's ridiculous.
Stipp: Really the confidence game around who is going to get paid and when, even if eventually everyone could get paid, starts to become an issue in and of itself in the shorter term.
Bob, thanks for giving us all the insights on the government data, the shutdown, and also your feelings about the debt ceiling.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.