With regard to the title, I am aware of the rule that says never end a sentence with a preposition. But I stand with no less an authority than Winston Churchill in saying that this is the sort of nonsense rule up with which I shall not put. So there.
While I’m deliberately ignoring that rule, there are several developments out there that we should be paying attention to.
The first one for today is the expiration of the debt ceiling extension. In other words, we’re back to using the “usual extraordinary measures” to allow the Treasury to pay the bills. We haven’t heard a lot about this, certainly not on the front pages, because there’s a general expectation that a deal will get done without the drama of previous debt ceiling confrontations.
I get it, and I tend to agree, if only because the Republicans are in a good position for the 2014 election cycle and probably want to avoid the kind of blame they received the last couple of times they tried to make the debt ceiling a bargaining tool. Nonetheless, this is something to be aware of—excuse me, of which to be aware. With an immigration deal looking unlikely, it’s clear that reports of the death of the conservative caucus in the House have been greatly exaggerated. This is a potential risk factor that doesn’t warrant a lot of concern, until it does. Pay attention to see when that might be.
The second thing to watch today is the slowdown in employment growth. Using the headline establishment report, job growth has dropped from an average of more than 190,000 per month in 2013 to 154,000 per month in the past three months. Today’s release of the January number, at a weaker-than-expected 113,000, wasn’t quite as bad as the December number—but the excuse we had then, of nasty weather, doesn’t work this time around. We did have bad weather in January, but the number of people reporting they couldn’t get to work was actually below the average of past years, so that explanation is out. Another possible explanation might be an unexpected immediate effect from the Affordable Care Act’s implementation. Regardless of the specific cause, the real question is whether the slowdown is short term or systemic.
This slowdown, like the debt ceiling, is something to watch, not worry about—yet. The household employment survey, which surveys households and uses a different analysis methodology, came in stronger than the establishment survey, which surveys businesses. We saw this same discrepancy in January, which provided some comfort at the time, and the larger job creation number, combined with a drop in both the unemployment and underemployment rates, indicates that things are still better than the headline numbers suggest.
Because of this conflicting data, the probability is still that this is a short-term slowdown and that the recovery is on track, but suffering from a seasonal weather glitch of some kind. The Federal Reserve is therefore unlikely to slow or stop its tapering process in light of these results. On the other hand, this release does raise the possibility that the recovery is slowing more than we previously thought—something that has to be watched.
The final point that bears watching was raised by one of our advisors, in response to a recent market commentary in which I stated that there were no new tax burdens pending. His point—and he is correct—is that, while there’s no new legislation or increase in tax rates, the implementation of last year’s tax hikes starts this year and, come April, will probably result in sticker shock for many taxpayers, with unpredictable consequences. Thanks, Ed!
It’s worth noting that, for most workers, the largest part of the tax increase was in the resumption of the 2-percent social security contribution, which is withheld from paychecks and has been in effect since the start of last year. But higher earners and the more affluent will get hit—hard—by the other tax increases. Not that I’m all that affluent, but I expect to be writing a largish check on April 15. For people who aren’t expecting it, this could be a real shock, potentially reducing confidence and the willingness to spend among that group.
This matters, because the growth in consumer spending has come almost entirely, in recent years, from the more affluent. A reduction in the rate of growth (see yesterday’s post) can have large effects, even as the absolute level remains stable. This will be something to keep a careful eye on over the next couple of months, as people meet with their tax planners and get the bad news. Consumer spending could be at risk here, which means the economy as a whole might be as well.
In my outlook for 2014, I ended up being more conservative in my estimates than many other analysts. Although regular readers know I’ve been an optimist with respect to the real economy, I also recognized that a great deal of good news was assumed in the more positive scenarios, and that things will inevitably go wrong. I remain positive, but the recent string of worrisome events and data points makes me glad that I opted to stay on the lower side with many of my estimates. Cautious optimism continues to make sense, with the points above providing a great deal of support for the cautious part of that statement.