The government appears to be settling in for an extended partial shutdown, at least as of January 2. If the shutdown persists beyond the next few days, however, the closure of several key agencies that produce statistics on the U.S. economy could begin to have an impact on financial markets, including REITs.
First, the good news. One of the main sources of information about the economy, the Labor Department, is fully funded, and its statistical agency, the Bureau of Labor Statistics (BLS), will continue to produce key reports. Most important is the monthly employment report for December, scheduled for release on Friday, January 4th. The monthly jobs numbers, average hourly earnings and the unemployment rate are critical pieces of information for businesses and investors. These figures often move financial markets, but if they had been canceled, a lack of information about the job market could have injected even greater uncertainty into global markets. Other reports issued by the BLS will also be issued according to the normal schedule, including the CPI and the JOLTS job turnover report.
The shutdown, however, has interrupted other key sources of market information. The Commerce Department is closed, including both the Census Bureau and the Bureau of Economic Analysis. The Census reports on construction spending (scheduled for release on January 3rd), retail sales (January 16th), and housing starts and new home sales (January 17th and 25th, respectively) may be delayed.
Should the shutdown drag on longer, the GDP report for Q4, including consumer spending and personal income, could be impacted. These are vital signs of the U.S. economy, even during calmer periods. Information on GDP growth and consumer spending is especially important today, as some analysts are raising questions about the strength of the economy and risks of a recession in 2019. (For the record, we still see the economy maintaining growth at a trend-like pace this year.)
The lack of information on economic fundamentals, should the shutdown persist, will heighten investors’ attention to company reports on Q4 earnings. REITs begin releasing their results in late January, as do most publicly traded companies.
There could be more earnings surprises than usual, positive or negative, as a result of an information vacuum about the economy. REITs, however, entered the fourth quarter in a solid position, according to the Nareit T-Tracker®. In particular, REITs posted solid earnings growth through the first three quarters of 2018, with Funds from operations (FFO) in the third quarter totaling $16.3 billion, 11.1 percent higher than one year earlier, and occupancy rates moving up to a record high. These operating conditions suggest that earnings season will show favorable results for REITs in the fourth quarter of 2018.