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Economic Week in Review: Shutdown now; debt ceiling ahead

October 04, 2013

The markets seemed to take the budget-related government shutdown that started Tuesday in stride. But the realization that legislators in Washington were girding for another battle—this one over raising the debt ceiling limit—weighed heavily on many minds. Bond investors are keeping cool heads for the moment, as rates fluctuated within a very narrow range of about three basis points.

For the week ended October 4, 2013, the S&P 500 Index was down 0.1% to 1,691 (for a year-to-date total return––including price change plus dividends––of about 21%). The yield of the 10-year U.S. Treasury note was up 2 basis points to 2.66% (for a year-to-date increase of 88 basis points).

Economic impact of government shutdown, debt-ceiling debates still TBD

Most economists believe the economic impact of a short government shutdown would be less painful than if the debt ceiling limit isn't raised by October 17, the date Treasury Secretary Jack Lew said was the last before the U.S. would need to borrow again.

Debt ceiling discussions have already begun in Congress. Leaders are considering pursuing a broader budget deal that addresses both the shutdown and debt ceiling. Most economists, including ours at Vanguard, believe the economic impact would be significant if lawmakers fail to act.

"Some estimates of the impact of the government shutdown peg the negative drag on growth at around 0.15% in the next quarterly GDP reading for each week the shutdown continues," said Vanguard economist Andrew J. Patterson. "The implications of not increasing the debt ceiling would be much harder to quantify and likely much further reaching. Confidence in the U.S. government’s ability to function and fund itself would be shaken, with ramifications extending from the confidence of domestic businesses and consumers to the faith of investors both at home and abroad."

The Treasury Department, in a report issued on October 4, compared the possible economic effects of the current debt ceiling debates to those that occurred in 2011. During the earlier debate period, consumer and business confidence dropped, the stock market declined while volatility increased, and interest rates rose. However, as pointed out in the report, the economic environment in 2011 was also less favorable than today's, with concerns about European debt stability still weighing on the economy.

Manufacturing highest since 2011 while service sector drops

The Institute for Supply Management's Manufacturing index of 56.2 beat consensus expectations of 55 to brighten the week. Of the 18 manufacturing sectors surveyed, 11 reported growth while 6 reported contractions. Several of those contracting sectors have some relationship: apparel, leather and allied products, and textile mills. The Employment Index, at 55.4, was up from August's 53.3 and was the highest this year.

The news was less cheerful for the service sector, where the index fell 4.2 points from August to 54.4. While still growing, the pace was slower than consensus expectations of 57.5 and the lowest since November 2008. The possibility of a government shutdown, combined with higher mortgage rates, may have factored into the service sector slowdown, as employers—including those in the housing sector—pulled back on hiring.

Manufacturing and services trends

Weekly unemployment claims up as new hiring still sluggish

Because of the partial government shutdown, the Department of Labor didn't issue its detailed monthly employment report on Friday. The department did, however, release its weekly jobless claims report. Claims were up about 1,000 over the previous week, to about 308,000.

Payroll processor ADP, which compiles a well-known report on private-sector hiring, found employers adding to their payrolls in September, albeit slowly. The 166,000 jobs—slightly less than economists expected—continued the sluggish growth ADP reported in August (159,000) and July (161,000). With 74,000 new hires, small businesses with 50 or fewer employees accounted for about 45% of the new private-sector jobs.

The economic week ahead

The Federal Reserve will issue its consumer credit report on Monday, while the Federal Open Market Committee will release its meeting minutes on Wednesday. Should the federal government shutdown continue through next week, the following reports may be unavailable: The Commerce Department's import/export trade data on Tuesday and business inventories scheduled for Friday, as well as the figures from the Labor Department on producer prices and retail sales, also scheduled for Friday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
September 30       0 bp –0.6%
October 1 ISM Index (September)
Source: Institute for Supply Management
56.0 55.0 +2 bp +0.8%
October 2       –3 bp –0.1%
October 3 Initial Jobless Claims (week ended September 28)
Source: Labor Department
308,000 311,000 –1 bp –0.9%
  ISM Non-Manufacturing Index (September)
Source: Institute for Supply Management
54.4 57.5
October 4       +4 bp +0.7%
    Weekly change +2 bp – 0.1%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
  • All investing is subject to risk, including possible loss of the money you invest.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax. We recommend that you consult a tax or financial advisor about your individual situation.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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