U.S. economy feels winter chill but shows healthy signs
- There are two primary ways for the weather to affect the economy: temperature and precipitation.
- The U.S. faced extremes in both during the winter of 2013–2014.
- We expect U.S. GDP to grow at an annualized rate of 1.5% in the first quarter.
- Overall, we think GDP growth will average 2.5 to 3.0% in the first half.
Vice President, Global Economist
U.S. economic data weakened unexpectedly in the first quarter of 2014. Many economists point to severe weather across the country during the winter as a key factor. However, others remain concerned about the economy’s condition. While it is impossible to determine the exact degree to which weather affected the economy, we believe it remains healthy. We think most, if not all, of the recent weakness was related to winter weather.
There are two primary ways for the weather to affect the economy: temperature and precipitation. During the winter months, periods of mild weather tend to boost economic activity as warm, sunny skies bring people out of their homes to shop and spend. But severe weather has the opposite effect. Frigid temperatures typically keep shoppers at home. Heavy snowfall can compound the impact since people may not simply face a decision on whether to stay home – many may be unable to leave. Transportation networks can be slowed or halted, causing delays in the delivery of supplies and a slowdown in work even outside the areas of heavy snow.
The U.S. had both issues during the winter of 2013–2014. Temperatures were much colder than normal in January and February. In fact, the demand for energy to heat homes and businesses was the highest for any February since 2007. Several storms produced major snow and ice across wide sections of the country and caused disruptions for large portions of the population. The impact varied in different regions of the U.S., depending on how well-prepared they were for winter storms. For example, a February snowstorm in the Northeast affecting more than 59 million people was categorized as “Significant,” while one in the Southeast affecting more than 26 million people was categorized as “Crippling.”¹ The latter storm led to a flood of news media stories from Atlanta and surrounding areas about people stranded on highways and abandoning cars and trucks. The storms obviously were detrimental to the production and transportation of goods, as well as consumer activities such as shopping and dining. Other storms around the U.S. in January were less severe but it is likely they also had an effect on economic activity.
Weather effect on the economy
We believe the impact of the severe weather early in the year is evident in the economic data. For example, the federal government reported retail sales in January and February fell 0.4% from the fourth-quarter average. Retail sales increased an average of about 1% in each of the prior four quarters. March retail sales data then showed a rebound as the weather began to improve, making the first quarter about unchanged from the prior quarter.²
The data also show disruptions in transportation. Leading up to the snowstorms, rail traffic had been increasing at a pace of 3 to 4% per year. However, there were sudden drops in rail traffic during several weeks in January and February. Data from the following weeks show traffic strengthening once again, which is indicative of a weather bounce back. It stayed cold in March, but we think the lack of disruptive snowstorms is likely to result in a boost to economic activity and further improvement in the second quarter.
We expect U.S. gross domestic product (GDP) to grow at an annualized rate of 1.5% in the first quarter of 2014, compared with our estimate of 2.5% growth prior to the weather’s impact. We believe there will be some payback to growth as activities are delayed into the second quarter. Overall, we think GDP growth will average 2.5 to 3.0% in the first half of 2014.
And what it means for Fed tapering
If the recent slowdown in economic growth was indeed due to weather, we believe the Federal Reserve (Fed) will continue to reduce the pace of its asset purchases – widely referred to as “tapering.” The Fed’s GDP forecast for 2013 is a bit above our estimate, but we do not think the difference is large enough to indicate the Fed will alter its pace of reducing asset purchases by $10 billion per meeting.
The Fed in March dropped the definitive link between lower interest rates and a 6.5% unemployment rate, saying it instead would consider a range of factors in determining when to begin increasing interest rates. It also reduced the pace of its bondbuying program to $55 billion per month. We believe the Fed will end the program in the fourth quarter of this year.
Weather not the only concern
Recent financial market price movements seem to reflect the confusion for many in the markets about whether the growth slowdown was based only on weather. At the same time, the market has become more concerned about rising interest rates, particularly on the shorter end of the yield curve. There also may be causes in addition to weather for the economy’s firstquarter slowdown.
- Rising tensions between Russia and Ukraine could depress market confidence.
- Economic activity in China continues to slow. If it becomes severe enough, it also could ripple through market confidence and foreign trade channels.
- Japan on April 1 increased its value-added tax, which is likely to slow economic activity in Japan.
- The pace of inventory accumulation in the U.S. has been a bit more rapid than expected, which could bring a slower pace of production in the short term.
While these issues are valid concerns, we think they are not great enough to cause the slowdown in the U.S. economy that we have seen thus far. We continue to watch all of these issues carefully for any signs that could disrupt better U.S. growth in 2014.
¹Source: National Oceanic and Atmospheric Administration (NOAA)
²Source: U.S. Commerce Department
Past performance is not a guarantee of future results. The opinions expressed in this article are those of Mr. Hamilton and are not meant to predict or project the future performance of any investment product. The opinions are current through April 16, 2014. Mr. Hamilton’s views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.
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