Wednesday, June 11, 2014

Economy should bounce after cold winter

An analysis of the bad winters reveals a clear tendency for the economy to bounce back strongly in the following quarter. This confirms the theory that pent up demand gets released in the spring. In the ten 2nd quarters that followed the ten snowiest winters, annualized GDP averaged a strong 4.4%, or almost four percent higher than the prior quarter. (The snap back was even more dramatic in the five snowiest winters, when the differential was more than five percent.) Based on this, we should see annualized 2nd quarter growth this year of at least three or four percent.

However, the raft of statistics that have come in over the past few weeks does not show that this is happening. A horrific trade deficit report came in this week widening to $47 Billion, the highest since July 2012. The data out this week also showed that consumer spending fell .1% in April (for the first time in a year), and that productivity falling in the 1st Quarter by 3.2% in the face of higher labor costs, which grew at 5.7% annualized. And although May's 217,000 increase in non-farm payrolls was in-line with expectation (following the big miss in ADP data earlier in the weak) it nonetheless represents a significant slowdown from April's 288,000 pace. The level of hiring did nothing to push up the labor force participation rate, which remained stuck at a 35 year low of 62.8%. Predictably, almost all of the jobs added were in low paying sectors that will not contribute much to overall purchasing power, like hospitality (mostly bars and restaurants), healthcare, and education. The report included a big drop in the number of construction workers added, which is the latest sign that the real estate sector is decelerating. 

But even if growth picks up in the 2nd quarter to 4%, my guess is that most analysts will herald the news as confirmation that the economy is back on track, and discussion of the weather will disappear. However, since half of that four percent will have been borrowed from Q1, Q2's higher growth rate will also be weather-related. But while everyone blamed first quarter weakness on the weather, very few will likely cite it as a cause for any potential second quarter strength. But if you add the minus one percent from Q1 to a potential plus four percent from Q2, the average would still only be just 1.5% growth for the first half of 2014. Despite this, the Fed has yet to revise down its full year 2014 growth estimates of 2.8% to 3.2% that it made at the end of last year. To grow at 3% for the year, even with 4% growth in Q2 (which is above the current consensus estimate), the economy would have to grow at 4.5 percent for the entire second half. Good luck with that.

Summary

So yes, the winter was bad, and yes it had an effect. But it was not likely the driving force of the first quarter slow-down and its effects should be very confined. But that won't stop the pundits from gnawing on that particular bone as long as they can get away with it. Unfortunately, they can get away with it for a long time.

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