Staring down another government shutdown, but this one should be brief

Note: There were two separate Economic Commentaries discussing the January Fed meeting and the Fed Chair pick published on January 28th and 30th, respectively.

Trend watch

As advertised, Winter Storm Fern punished most of the continental United States. That snarled air traffic, with passenger counts down 16.3% from a week ago to 12.9 million. That’s the lowest weekly count since February 2022. 

Our take

Winter Storm Fern hammered most of the U.S. Unfortunately, the backend of Fern also ushered in bitter cold this week for roughly two-thirds of the country.

The good news is that there doesn’t seem to be any appetite for another partial government shutdown on January 30th from either side of the aisle. The Senate is scrambling to pass funding bills – known as continuing resolutions – as we type on Friday afternoon.

The bad news is that the wicked winter weather appears to be complicating the logistics of avoiding a shutdown. The House of Representatives, which passed their funding bills earlier in the week, broke for district workdays. But both chambers will need to vote on the spending bills before the entire package goes to President Trump, who’s publicly said he’s on board. Thus, a brief partial government shutdown seems likely until those votes occur on Monday – or perhaps Tuesday if weather in Washington, D.C. messes with travel.

The silver lining is that we don’t expect a repeat of 2025. If there’s another partial government shutdown, it will only last a few days.

However, lost in today’s excitement about the announcement of the nomination of Kevin Warsh as Federal Reserve (Fed) Chair, wholesale prices jumped in December as trade services surged.

In the context of the Producer Price Index (PPI), trade services do not measure the price of physical goods. In other words, this isn’t about foreign trade (i.e., imports & exports). Instead, trade services measure the gross margins received by wholesalers and retailers. These entities are providers of "distributive services" rather than manufacturers, as they typically do not transform the physical product before sale. The "price" of a trade service in the PPI is the difference between the selling price of an item and the cost of acquiring that item for resale, more commonly known as the margin price.

We’ve been concerned about when cost pressures would appear in the inflation trend. Typically, PPI leads consumer prices by several months, somewhere between three to six months depending on the component. For instance, moves in energy prices, such as gasoline and diesel, are almost instantaneous and show up in the inflation statistics within a month or so. Conversely, price movements in other categories, such as vehicles, are much slower, taking six months or longer to materialize.

While we aren’t overly concerned, the direction of inflation shifted and is no longer grinding lower. Indeed, in our 2026 outlook, we anticipated that inflation would tick higher.

Nonetheless, inflation ticking higher might be the first challenge for Mr. Warsh and the rest of the Fed in the coming months.

Lastly, we now don’t expect to get a clear read on the economy for another month – until late February or early March – due to the 2025 government shutdown.

Bottom line

The U.S. economy remains resilient, but the data is still muddied by the government shutdown, which has created distortions and delays. We likely won’t get a clear read on the economy until late February or early March. Nonetheless, we expect an uptick in U.S. growth to 2.3% in 2026 thanks to four primary drivers – tax incentives for consumers and businesses, marginally lower borrowing costs thanks to Fed easing, steadier trade policy and tariffs, and continued investment in AI and technology spending.