(27 JANUARY 2019)Thought of the weeken:US economy: solid data but political risks loom large

US data released on 24 January points to ongoing strength in the US economy. The labor market continues to tighten – weekly jobless claims fell by 13,000 to 199,000, the lowest level since 1969. The Markit composite PMI index inched up to 54.5 from 54.4 last month driven by improved manufacturing activity, which increased to 54.9 from 53.8 in December.

But, looking ahead, political headwinds, which could weigh on growth, still need to be overcome.

• The US government shutdown is in its 35th day and with President Donald Trump tweeting “We will not cave!” a resolution doesn’t appear imminent. Kevin Hassett, chairman of the Council of Economic Advisers, estimates that each week the shutdown lasts reduces quarterly economic growth by 0.13%-points, which is in line with our own estimates.
• In our view, the economic cost of the shutdown will also accelerate the longer it continues. Some government agencies had enough spare funds to continue operations for a short period, and that money is running out. Without a resolution, the shutdown could push first quarter growth into negative territory.
• Trade rhetoric has been less positive this week. US President Donald Trump warned Beijing to “stop playing around!” on Twitter and US Commerce Secretary Wilbur Ross characterized the two countries as being “miles and miles” apart.We think there will be some degree of political resolution. We expect that rising political pressure will lead to a breakthrough that ends the shutdown soon. On trade, our base case, to which we assign a 45% probability, is for small advances in the negotiations which should deliver partial agreements that postpone additional sanctions. Against this backdrop we remain overweight in global equities, but combine this exposure with countercyclical positions and hedges to protect against the downside risks.
• by UBS