ANALYSIS-Shutdown clouds outlook for consumer-driven U.S. economic growth

(Repeats for wider distribution)
By Nandita Bose and Howard Schneider
NEW YORK, Jan 18 (Reuters) - After tax cuts, rising incomes
and buoyant stock markets set off a consumer boom in 2018,
signs are emerging that the main engine of U.S. economic growth
could sputter, and a record-long government shutdown further
muddies the waters.
Federal Reserve officials and many economists have long
counted on continued robust consumer spending to keep the
economy chugging along, despite headwinds from recent financial
markets turbulence, trade conflicts and weakening global growth.
Now they fear the consumer boom could be on the cusp of a
The warning signs span the income spectrum - from the
well-heeled possibly cutting back after their stocks got
hammered last fall, to the poor potentially getting squeezed if
a lingering government shutdown delays food assistance payments.
Economists are also not certain, for example, whether last
year's personal income tax cut will lead to higher refunds and
boost big-ticket purchases, such as home appliances, typical for
this time of year, or whether the windfall was already spent
last year when paycheck withholding declined.
The shutdown, now in its 28th day, could delay refunds and
hit companies that rely on consumers spending a chunk of that
money on their goods or services.
The chief financial officer at T-Mobile US told
investors last week any delay in refunds was a concern for the
company because its prepaid business, roughly 30 percent of
sales, was "particularly sensitive" to tax refunds.
"Hopefully, this situation doesn't go on too long," J.
Braxton Carter said.
A delay in refunds could also hurt home improvement chains,
such as Home Depot , Lowe's Cos Inc and Wayfair
Inc that see furniture purchases and early spring projects
boost sales. "We don't see any material impact," a Home Depot
spokesman said without elaborating. Lowe's and Wayfair did not
respond to a request for comment.
The government shutdown clouds the outlook for spending,
retailers and the economy at large because executives and
policymakers weigh not the direct impact of 800,000 federal
workers going without pay, but also how much it can hurt
consumer and business confidence.
Chicago Federal Reserve President Charles Evans said last
week that while the immediate effects of the shutdown on the
U.S. $20.7-trillion economy would be small, the indirect,
psychological impact could be substantial.
"Consumers get risk averse and start hunkering down,
businesses start planning to do less, and you start magnifying
these effects," Evans said.
Former Federal Reserve chair Janet Yellen noted a general
cooling of business sentiment at a retail trade show in New York
last week. "We are hearing anecdotal reports about businesses
beginning to put investment plans on hold because of
uncertainty," she said. Those investments could include things
like upgrades to a retailer's supply chain, Yellen said.
Constance Hunter, chief economist at KPMG told Reuters if
the shutdown goes on until the end of the month "we will shave a
couple of percentage points from first quarter (gross domestic
Such concerns have spread among Fed officials who now
advocate patience before considering any further rate hikes.

Consumer spending accounts for about two-thirds of U.S.
economic activity, and the 4 percent jump in household spending
on goods last year was a major reason the economy probably grew
by a healthy 3 percent in 2018. More recently, robust
consumption offset weaker-than-expected business investment and
the drag from trade, and was expected to mitigate the waning
impact of the Trump administration's earlier spending splurge.
Economists had already anticipated that higher interest
rates and trade tensions would slow growth in household spending
on goods and services after it hit $13 trillion last year.
The question is how much and the shutdown made the answer
more difficult.
Steven Blitz, chief U.S. economist at TS Lombard said the
economy appeared to be slowing down, noting reports from Macy's,
Nordstrom and other retailers talking of a weak December, and he
expected the shutdown to hurt first quarter growth.
"Some of it will come back in the second quarter, but there
will be some industries that will see lasting damage such as
restaurant operators," he told Reuters.
These would include chains like McDonald's Corp ,
Chipotle Mexican Grill and Starbucks Corp ,
which analysts said will be unable to make up for lost sales to
government workers during a shutdown.
The companies did not immediately respond to a request for
Brian Cantor, managing director of Alvarez & Marsal's retail
performance improvement group, said grocery chains, including
Walmart Inc and Kroger , could feel the pinch of
weaker discretionary spending. While food staples sales will
hold up, typical add-on purchases like batteries, chips,
magazines or chocolates will suffer, hurting profit margins.
Kroger CEO Rodney McMullen expressed this concern last week
at a retail trade show. "From a customer standpoint ... they
feel incredibly good about the economy, but very nervous about
where are things headed," he said.
Walmart declined comment.
Small, independent retailers, which often serve low-income
communities, may also suffer.
While the administration has assured funding through
February for government transfer payments for the Supplemental
Nutrition Assistance Program (SNAP), which provides food
assistance to 19 million low income households, the shutdown has
impaired granting new licenses and renewals.
Peter Larkin, President and Chief Executive of the National
Grocers Association, sent a letter to Congress on Jan. 10,
saying the shutdown prevents many independent retailers from
acquiring SNAP licenses for their newly opened stores, and that
more than 2,500 retailers have experienced a lapse or inability
to reauthorize their license.
"The inability to acquire new SNAP licenses for newly-opened
or purchased stores could have significant negative impacts to
local economies," Larkin said.

(Reporting by Nandita Bose in New York and Howard Schneider in
Additional reporting by Anna Driver in New York
Editing by Dan Burns and Tomasz Janowski)

First Published: 2019-01-18 08:00:00
Updated 2019-01-18 14:00:00

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