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News & Analysis US


February 25, 2014, Tuesday, 17:46 GMT | 13:46 EST | 23:16 IST | 01:46 SGT
Contributed by Raymond James

Harsh winter weather often shows through in the economic data. Large seasonal adjustment can magnify that impact. Snowstorms happen every year, of course – the key is whether they are worse than usual. This year, bad weather has been relatively widespread, affecting many areas of the country and much of the economic data for December, January, and February. None of the bad weather has had a significant impact on the longer-term outlook and investors have begun to take the economic news with an appropriate grain of salt.

Prior to seasonal adjustment, nonfarm payrolls fell by 2.87 million (-2.1%) in January. Retail sales sank 19.3% (with clothing stores down 52.2%, department store sales down 54.4%), reflecting the end of the holiday shopping seasonal. Housing starts fell 15.0%, following a 17.1% decline in December. These seasonal swings are huge, but they haven’t been significantly outside the usual winter patterns.

It’s not that the various government agencies don’t do a good job with the seasonal adjustment. For the statisticians, the methodology is about as good as it can get. Rather, seasonal adjustment is a difficult task in the winter months. Storms can have mixed effects depending on where they hit (Midwest, Northeast, South, West) and when then hit (weekday, weekend). All of this is taken into account in the adjustment.

In the last few years, there has been some concern that the seasonal pattern in nonfarm payrolls may have been distorted by the Great Recession. Job losses were at their worst in the first quarter of 2009, which may have altered the estimated seasonal pattern. As a consequence, adjusted first quarter job figures in later years would look somewhat better than they would otherwise. However, the seasonal adjustment will balance that out over the course of the year and any impact of one bad season would wash away over time.

While much of the recent economic data have been distorted by the weather, the economic outlook for 2014 as whole has remained optimistic. This is largely a story of reduced headwinds and increased tailwinds. Consumers are in generally better shape. Banks should gradually ease terms and lending conditions. Monetary policy will remain accommodative. Lawmakers have finally gotten their act together. We have a budget for both FY14 and FY15. The debt ceiling has been waved until March 15, 2015. Long-term budget challenges remain, but there’s no chance of a government shutdown.

Still, there are a few worries. The turmoil in emerging economies bears watching closely. In comparison to the Asian financial crisis of 1997, countries generally have adequate currency reserves and better technical expertise in how to deal with financial strains. However, capital crises are notoriously hard to predict (at least in magnitude, if not in direction).

Another concern is whether consumer fundamentals will remain supportive. Fourth quarter income and spending numbers will be revised on Friday. As the numbers stand now, the pace of spending was well beyond what would be justified by the growth in personal income. Spending figures are expected to be revised lower and income numbers often see relatively large revisions. However, inflation-adjusted income gains for the typical worker have remained relatively weak. You can still get aggregate gains in real income through job growth, but your average worker is simply running in place. Increases in housing wealth help to some extent (not through equity extraction – rather, consumers “feel” wealthier). Consumer debt picked up in 4Q13, which is not necessarily a bad thing.

The minutes of the January FOMC meeting showed “a clear presumption” of a steady pace of tapering. It would take a “substantial” deviation in the expected path of the economy to alter that plan. We’re still far from that at this point.