I expect to hear shortly the refrain among financial analysts and talking heads to explain the recent spate of relatively weak U.S. economic news: It’s the weather!
Last year about this time, you remember, we were told that the unexpected 2.9% annualized drop in first quarter 2014 GDP was an aberration and all due to the harsh winter weather. And the economy did indeed rebound sharply after that, with full year 2014 GDP growth coming in at 2.5%. Hardly spectacular growth, but a lot better than the horrible first quarter would have indicated and certainly a lot better than other places outside China and India.
So maybe there was something to that weather thing, although I think it took way too much of the blame.
But what are we to make of recent economic reports covering the past few months, which show a definite slowing of economic activity? Are we to blame this on the weather, too? Can we really blame everything on the weather, or are there other things at work?
Close friends of ours are ardent true believers in climate change (or what used to be called “global warming;” the people who created this alleged crisis have had to change its name since most of the weather lately has been on the frigid side, making them look a bit silly.)
Whenever it’s inordinately hot, our friends shout confidently, “That’s global warming!” But when it’s 20 below zero and there’s two feet of snow on the ground, they scream even louder and more confidently, “Now THAT’S global warming!”
So no matter what happens, their theory is always correct, and they have the “evidence” to back it up. It must be nice to always be right.
I see the same thing coming about the U.S. economy. It’s the weather, stupid!
Retail sales have now dropped sharply two months in a row, falling 0.8% in January following December’s 0.9% decline. That’s the first back-to-back drop since 2012. While some of the decrease was due to plunging gasoline sales owing to lower prices, sales overall were disappointing. After excluding purchases at gas stations, which dropped 9.3% after falling 7.4% in December, retail sales were unchanged in January after falling 0.2% in December.
Consumer spending fell 0.3% in December.
The Conference Board’s consumer confidence index climbed nearly 10 points in January to 102.9, its highest level since August 2006, while its present situation index climbed to 112.6 from an upwardly revised 99.9 in December.
You would have thought that the sharp drop in gasoline prices, and the concurrent jump in confidence, would have boosted spending, but that hasn’t happened. Apparently American consumers are either pocketing that savings or paying down debt, not that there’s anything wrong with that. They’re definitely not spending it. Maybe it’s too cold.
Durable goods orders fell an unexpectedly steep 3.4% in December after falling a downwardly revised 2.1% in November.
The Institute for Supply Management’s widely-watched manufacturing purchasing managers index fell to 53.5 in January, its slowest rate in a year. The new-orders index fell nearly five points to 52.9. The ISM’s index for the services sector, which covers a much bigger piece of the economy, remains well below the peak reached last August.
But the one consistently positive metric we can point to is the strong growth in jobs.
Last week’s blowout Labor Department report showed that 257,000 new nonfarm jobs were created in January, while the employment totals for November and December were revised higher by almost 150,000. The U.S. economy added nearly three million new jobs in 2014, the most in 15 years.
What is the Fed going to make of all this? Will it look at the jobs figures and feel that the economy – and perhaps more importantly, the financial markets – are now strong enough to withstand a small increase in interest rates? Or will it look at the other less buoyant numbers and conclude that it’s still too early?
Not to mention the lack of growth in Europe and Japan and falling growth in China, which the Fed can add to its rationale for not doing anything anytime soon. The Fed certainly can’t start tightening monetary policy and raising rates when just about every other country is doing the opposite.
While I was formerly optimistic that the Fed was going to start monetary “normalization” – i.e., raising rates – sooner rather than later, now I’m not so sure. The Fed always seems to be looking for an excuse not to have to do anything that might upset the markets, and the weakening of some of the economic numbers here and abroad might just give it enough of an excuse to remain “patient,” its latest buzzword.
Hey, it can always blame it on the weather.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.