Bloomberg News

Fed Isolates Weather From Weakness as Growth Cools: Economy

February 14, 2014

Fed Seeks to Isolate Weather

A Park Service employee clears snow in front of the Lincoln Memorial in Washington, D.C. on Feb. 13, 2014. Photographer: Charles Dharapak/AP Photo

This year’s harsh winter is causing the pace of U.S. economic growth to fall along with the mercury.

February payrolls may be the next victim of the severe weather that has gripped the country during the last three months, following disappointing data on retail sales and manufacturing in January. This week’s snow and ice storms in the eastern U.S. came during the period the Bureau of Labor Statistics refers to in its monthly employer survey, which it uses to calculate changes in payrolls, hours and earnings for the jobs report scheduled for release March 7.

That may make it difficult for Federal Reserve policy makers to gauge whether signs of weakness can be chalked up to the elements, or if the economy has taken a turn for the worse. Firms from Goldman Sachs Group Inc. to Morgan Stanley have reduced their estimates for first-quarter U.S. growth, after forecasters entered the year with the most optimism since 2010.

“We had a strengthening pattern in consumer demand and that’s been revised away,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, who lowered his first-quarter growth estimate to an annual pace of 2.3 percent from 2.5 percent. “The weakening pattern in the first-quarter data probably is attributable to weather.”

To be counted as employed in the BLS survey, workers on non-farm payrolls must have received pay for some part of the earnings period that includes the 12th of the month. The winter storm may affect the February survey results if large numbers of workers had to stay home for the entire period without pay and weren’t counted.

Factory Production

A report today from the Fed showed factory production unexpectedly declined last month by the most since May 2009, in part because of the weather.

The 0.8 percent drop followed a revised 0.3 percent gain the prior month that was weaker than initially reported. The median forecast in a Bloomberg survey of economists called for a 0.1 percent advance in January.

Shoppers may pick up the pace of purchases after the weather improves, other figures today indicated.

The Thomson Reuters/University of Michigan preliminary index of sentiment held at 81.2 this month. The median estimate in a Bloomberg survey called for a drop to 80.2. A gauge of the economic outlook improved to the highest level in six months.

In the euro area, data showed the economy expanded more than forecast in the final quarter of 2013, led by Germany and France. Gross domestic product rose 0.3 percent after a 0.1 percent increase in the third quarter, the European Union’s statistics office said.

Stocks, Treasuries

The Standard & Poor’s 500 Index climbed 0.5 percent to 1,838.63 at the close of trading in New York. The yield on the 10-year Treasury note increased one basis point, or 0.01 percentage point, to 2.74 percent.

The disappointing U.S. data on manufacturing and retail sales followed two straight employment reports that fell short of economists’ forecasts. Payrolls grew by 113,000 in January and by 75,000 in December, the weakest back-to-back gains in three years.

Because this week’s storm fell during the employer survey period, the weather effect may be even greater in February’s report, said Englund.

While his forecast calls for payrolls growth to accelerate to 170,000, “we do see the risk now to the downside,” he said. “We don’t see much room for catch-up. The question now is whether there is going to be an additional hit.”

Offices Closed

Government offices in Washington closed yesterday as a winter storm that paralyzed the South with snow and ice moved to the Northeast, canceling flights, snarling traffic and downing power lines along the way. This month’s storm follows the coldest January since 1994 in the contiguous U.S., based on gas-weighted heating-degree days, a measure of energy demand, according to Commodity Weather Group LLC in Bethesda, Maryland. The U.S. Northeast is also on track for the coldest winter since 1982, measured from December to February, the group said.

In Washington, snowfall of 11 inches forced Jessica Friedman, a 26-year-old speech pathologist, to take the day off from work after bus service in the city was suspended, limiting commuting options.

“I don’t plan to do any shopping, and I couldn’t go out even if I wanted to,” she said.

February Outlook

To the extent other shoppers reacted like Friedman, retail sales may slump in February, following disappointing data for last month. Sales declined by 0.4 percent in January after a 0.1 percent decrease in December that was previously reported as a gain, Commerce Department data showed yesterday. Economists had forecast no change in January.

Companies including McDonald’s Corp. (MCD:US), the world’s largest restaurant chain, are pointing to the weather as an explanation for disappointing sales.

Purchases at stores open at least 13 months slid 3.3 percent last month in the U.S. “amid broad-based challenges including severe winter weather,” the Oak Brook, Illinois-based company said in a Feb. 10 statement. The January decline follows drops of 3.8 percent in December and 0.8 percent a month earlier.

The drop in U.S. retail sales reported yesterday prompted economists at Goldman Sachs Group Inc. to cut their tracking estimate for first-quarter gross domestic product to 1.9 percent from 2.3 percent. Morgan Stanley reduced its projection to 0.9 percent from 1.9 percent, while Credit Suisse lowered to 1.6 percent from 2.6 percent.

Forecasts Cut

Economists had entered January with the highest first-quarter GDP growth forecast since 2010, predicting a rate of 2.6 percent, according to a Bloomberg survey. They now project a 2.2 percent pace.

Looking past the weather, consumer spending, which accounts for almost 70 percent of the economy, is being held back by stagnant wages and job growth that’s been slow to accelerate over the past three years, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

“You have to assume there are going to be some more weather impacts in February,” said Stanley, who lowered his first-quarter growth estimate to 0.7 percent from 0.8 percent. “It behooves us to take a closer look and try to get our hands around what’s going on here. There’s some weather impact, but there’s more than just that going on here.”

Another report yesterday showed more Americans than forecast filed applications for unemployment benefits last week, with claims rising by 8,000 to 339,000 in the week ended Feb. 8, a Labor Department report showed.

Inconsistent Gains

Inconsistent job gains combined with the slump in retail sales indicate momentum is probably slowing after stronger year-end growth, said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York.

Even so, he said he looks for a rebound in coming months. As weather distortions fade “and you start getting a cleaner picture on growth, you’re likely to see an economy that’s performing above potential,” Mulraine said.

More clarity may not come before March 19, when Fed policy makers decide whether to continue scaling back their unprecedented bond-purchase program.

The Fed said Jan. 29 it would further trim its monthly purchases amid optimism that U.S. economic growth is improving. It cut the buying to $65 billion, from $75 billion, in its second $10-billion reduction in as many meetings.

Fed Chair Janet Yellen, during her Feb. 11 testimony at the House Financial Service Committee, affirmed the central bank’s strategy of paring purchases in “measured steps.”

Fed officials have to be careful not to jump to conclusions in interpreting recent weak jobs reports, Yellen said.

“We’ve had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere,” Yellen said. When the Federal Open Market Committee meets in March, “we will have a broad range of data on the economy to look at,” including an additional employment report, “and I think it’s important for us to take our time to assess just what the significance of this is.”

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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