The shutdown leaves Bernanke flying blind

If the US deadlock continues much longer, a raft of missing key economic data will further complicate the Fed’s tapering decision - and global markets may be taken by surprise.

The economic ignorance of the holdouts extending the US government shutdown is frightening. Alongside the many services the government provides are live data about the state of the economy – essential information for policymakers at the Fed and anyone who makes investment decisions based on the current state of demand.

But among the macroeconomic releases missing in action since the shutdown began are the critical nonfarm payrolls report, as well as retail sales, trade and producer prices. If the shutdown continues into its third week, figures on consumer prices, housing starts and industrial production will be postponed. These detailed reports are broadly based and less volatile than some of the regional, private-sector data reports that are still coming out.

That leaves an enormous vacuum at the heart of the discussion at the next policy-setting Federal Open Market Committee, scheduled for October 29-30. Ben Bernanke, Janet Yellen, the Washington-based governors and the regional Fed bank chiefs may have to discuss the state of the recovery without clear information about inflation, employment or any other key part of the economy. They will be flying blind.

In fact, if the shutdown continues, the actual fieldwork when government bureaux workers gather information for the November data releases could also be affected. And that would hamper the ability of the Fed to start pulling back on its quantitative easing program at the December meeting. And so it goes on.

(In an opportunistic leap into the breach, private equity giant the Carlyle Group is analysing data from the 200 companies it owns, which it claims is highly correlated to several official statistics such as retail sales and industrial production. Carlyle says its figures point to continued sluggish growth in September.)

Fortunately, state unemployment agencies and the Fed itself are run outside of the federal appropriations process, so some data will still trickle out, including the Fed’s nationwide anecdotal survey called the Beige Book, which forms part of each policy meeting’s discussion.

The minutes of the September FOMC meeting showed that most of the members – 14 out of 17 policymakers and presumably all but the leadership, according to HSBC – still would prefer to begin tapering by year’s end. But they also want to see evidence that the economy is strong enough to bear the move.

Meanwhile, last week’s claims for US jobless benefits showed the damage spreading from the government shutdown to employers that depend on government business. At least 15,000 non-federal workers were furloughed and that number could well be higher this week.

Both sides of US politics appear blind to the reality that the longer they hold the government hostage, the more work is left to be done by monetary policy. The greater the hit to spending and employment from the shutdown, the riskier it becomes for the Fed to begin to withdraw its stimulus. And when it eventually does, the harder it will be for investors – from Wall Street to fragile emerging markets – to adjust.

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