So far, it’s been a chilly spring for the economy. Growth in most U.S. metrics has been slow for three months or longer. Some of that stagnation is weather-related, but certainly not all. Factors such as the government shutdown and budget settlement, major inventory build-ups, and higher interest rates have all been negatives for recent economic activity.
Federal Reserve News: The Federal Reserve policy statement, economic forecast, and press conference on March 18-19 didn’t really tell markets much that they didn’t already know. Much emphasis was placed on Fed Chairwoman Janet Yellen’s comment that rates could begin to be raised as soon as six months after the bond-buying program was completely wrapped up. Irrespective of when, one thing’s for certain: rates are going higher and investors will have to learn to live with it. However, unless the economy picks up a little steam soon, the Fed may not feel nearly as aggressive a month or two from now.
Housing: Existing-home sales fell from an annualized 4.62 million units in January to 4.6 million units in February. That is after a giant swoon between July 2013, when existing-home sales peaked at 5.38 million units, and the most recent 4.6 million level. A drop of 14% in unit sales in the middle of a recovery is more than a little disconcerting. In terms of total dollar values transacted, the market is down 20% from its July peak. Similar to the existing-home data, monthly housing starts changed little from January to February after several months of decline, perhaps indicating that the bottom is in, which would be a welcome relief. Data for housing permits looked better, but most of the improvement came from multifamily homes, which tend to be less expensive and add less to GDP growth.
Inflation: The headline inflation number for consumers looked great on a top-line basis. Month-to-month prices were up just 0.1%, and an amazingly low 1.1% when comparing February of this year with February of last year. However, the categories that were up are truly important to consumers. Grocery prices were up 0.5%, airline fares 1.3%, and drugs 0.9% after showing almost no growth in 2013. Holding back price increases was gasoline (down 1.7%). That was a bit of a mirage, though, as bad weather delayed normal refinery shutdowns from February to March.
GDP: The estimate of GDP growth in the fourth quarter of 2013 was bumped up modestly from 2.4% to 2.6% at an annualized quarter-over-quarter basis. The more representative full-year growth rate for 2013 was unchanged at 1.9%. Interestingly, both the annualized sequential growth rate and the fourth-quarter-to-fourth-quarter growth rate are now equal, at 2.6%. So it would appear that the economy’s true GDP growth rate lies somewhere between the bounds of 1.9% and 2.6%. A meaningful shrinkage in the government sector just about cancelled an unusually large (and not sustainable) increase in exports. Business spending picked up some but not a lot, and residential investment was a net detractor from GDP growth for the first time since 2010.
Quarter-End Insights: The U.S. economic data has shown signs of weakening for the past three months running, despite some real optimism that developed in the fourth quarter of 2013. That optimism was based on the end to the fiscal stalemate in Washington in October, a 4.1% GDP growth rate in the third quarter, and a 3.2% estimated growth rate in the fourth quarter (later revised down to only 2.4%). Sky-high retail sales data that was subsequently revised sharply downward also contributed to economists’ bright mood at the end of 2013. However, poor weather seems to have interrupted the upward trajectory. The effects of abnormally cold and snowy weather seem real, but the weather is not the only cause for the recent weakness. Parts of the economy, including the housing sector, were already showing some slowing even before the cold weather arrived.