February 14, 2014

Hard winter, soft economy


Data falling with the snow

At the end of last year, virtually all economic reports in the United States were accelerating. Nonfarm payrolls were consistently better, manufacturing activity was picking up and consumers were poised to spend again. Since then, we’ve seen softness in home sales and car sales — the two linchpins for my case that the economy has continued to move forward. Factory orders and retail sales have also been disappointing relative to expectations.

Can we say that the steady storm of harsh winter weather has been the culprit? Certainly that could be the case with autos and perhaps housing in the affected regions, but not with factory orders. I doubt that weather is the whole story. There must be something else.

Seeing some inconsistencies

So far in February, various conflicting signals haven’t been much help to investors who are trying to make decisions about this market. For example, US manufacturing new orders in the Institute for Supply Management (ISM) January survey posted the fifth largest drop since 1948, while the decline in the Markit PMI (purchasing managers’ index) was much more modest.

All eyes were on last Friday’s release of the January employment situation, looking for confirmation that the economy is either slowing down or continuing to expand. What we got was another disappointing report, with more ambiguous data for a month that was again marked by weather concerns. According to the establishment survey, private sector and government payroll gains were weaker than expected, though weather-sensitive construction jobs increased. According to the household survey, on the other hand, the number employed and in the labor force both posted sizable gains, and fewer respondents than usual were “not at work because of weather” in January.

Taking the economy’s temperature

There may be a midcycle slowdown — we see these frequently in expansions, including as recently as 2012. But I suspect that this is more of a wobble along the trajectory of continued moderate growth. In other words, I think these symptoms suggest that the US economy has a cold, not the flu. To back up my diagnosis, let me point out what else is happening — the durable facts we know about this cycle:

  • US GDP is averaging 2.4% real growth during this expansion, with private sector growth at 3.4%, and we’re still seeing subdued inflation but not deflation.
  • Energy prices are low, and if the turmoil in emerging markets further depresses the cost of energy, that could be a huge plus for US consumer spending.
  • Pent-up demand from population growth, rising personal income and the aging of the car fleet all have the potential to promote better housing and car sales.
  • Indications from S&P 500 companies reporting earnings for the final quarter of 2013 suggest a rising tide of revenues and profits along with very healthy net margins.

Staying on course

Let’s consider the overall arc of this expansion, which is going to be five years old in July. We’ve talked a lot about what’s been behind it, not as much about what could end it. Typically expansions end with policy errors — massive changes in fiscal policy, say, or sudden rises in interest rates. But there are no tax increases due this year, and the passage of the so-called clean debt ceiling bill suspends the US borrowing limit until March 2015 at the earliest, providing a more certain and stable backdrop for businesses and financial markets.

With US Federal Reserve Chair Janet Yellen giving her first congressional testimony this week — although her appearance before the Senate Banking Committee was postponed because of adverse weather — we have more evidence that the Fed is continuing her predecessor Ben Bernanke’s policies. We see the gradual tapering of quantitative easing as meaning less monetary accommodation — but not the tightening of interest rates — as we go through 2014.

Putting the pieces of the puzzle together, I can say that the durable, sustainable cycle we’ve been witnessing is undergoing pressure, not termination. There may be reasons to remain cautious, but I don’t see a recession here. I believe the US economy is staying on course.





No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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