March 30th, 2014
by Camden Cornwell, Federal Reserve Bank of Dallas
Economic data released in the last six weeks suggest economic growth has softened since January. However, weather-related distortions of business and consumer activity have temporarily obscured the picture of the underlying economy. The February employment report, industrial production and March Beige Book suggest that this softness is temporary, and private-sector forecasts anticipate a bounceback as growth expectations for the remainder of the year have inched upward.
Fourth Quarter 2013 Output Growth Revised Downward
In February, the Bureau of Economic Analysis revised fourth quarter 2013 real gross domestic product (GDP) growth downward from 3.2 percent to 2.4 percent at a seasonally adjusted, annualized rate (SAAR). These downward revisions, which were anticipated, come largely as a result of lower personal consumption expenditures (PCE) and residential investment. A notable exception was real nonresidential investment growth, which nearly doubled to 7.3 percent (SAAR) in the fourth quarter, in line with annual growth figures from 2011 and 2012.
Leading Economic Indicators Soft for Beginning of 2014
The Conference Board’s Leading Economic Index softened in the beginning of 2014, particularly driven by weaknesses in housing and hours worked. A glance at data from the National Oceanic and Atmospheric Administration points to likely weather-related shocks. Heating degree days, which estimate energy demand to heat homes or businesses, deviated largely from the 10-year average in recent months, suggesting that this winter has been relatively frigid (Chart 1). In addition, disruptive weather measured by the quasi-national Northeast Snowfall Impact Scale (NESIS) shows a recent bout of historically bad storms in terms of duration and severity (Chart 2). To what extent weaker recent economic data are attributable to weather remains to be seen.
But Payrolls and Industrial Production Look Good
Amid the cold, the economy added 175,000 seasonally adjusted nonfarm jobs in February, surpassing Bloomberg Consensus estimates by 25,000. Upward revisions of 15,000 jobs for January improved the labor market picture as well, pushing up the overall six-month moving average—a less-volatile metric of job creation—to a healthy 177,000 (Chart 3). Unemployment levels ticked up marginally, but steady labor force participation rates suggest that workers reentering the labor force are a likely cause. The decrease in hours worked is likely due to weather disruptions forcing workers to stay home.
Industrial production also beat expectations with a 0.6 percent increase in February. The increase was driven primarily by auto production, which rose 4.6 percent in February after falling more than 5 percent in January. The positive employment and production reports offer optimism for a bounceback in the spring.
Sluggish Housing Starts and Sales
January housing starts fell precipitously by 168,000 units (SAAR) for both multi- and single-family housing (Chart 4) and held relatively flat in February. Single-family housing permits, a more forward-looking indicator of housing start performance, have also continued to slow in recent months, although February multifamily permits saw the largest single period rise since June 2008. Existing single-family home sales have continued to decline from the July 2013 high of 4.8 million units to 4 million units in January 2014 (SAAR). However, new single-family home sales rose at a rapid clip of about 10 percent in January and generally tend to lead existing sales by one or two months.
The March Beige Book reports that weather-related factors have slowed residential activity; however, rising house prices and the introduction of new qualified mortgage rules are also likely to have suppressed the housing market. In coming months, construction and sales are likely to pick up in response to low inventories and pent-up demand for housing.
Inflation Is Still Anchored
Inflation figures remain persistently low, with core PCE coming in at 1.2 percent year over year for January, and the headline consumer price index (CPI) at 1.1 percent year over year for February. Inflation trends broken down by PCE components show that year-over-year services price inflation, which makes up two-thirds of consumption expenditures, is lower than before the recession (Chart 5). Nondurables, which compose about a quarter of consumption expenditures, have fluctuated around zero in recent months. Despite persistently low inflation, expectations for future inflation remain anchored at target rates, and the consensus of many inflation models suggests that inflation will normalize in the coming months.
Slowness in January and February is attributable in part to weather, but some underlying softness may have also slowed growth. However, recent production and employment reports are encouraging. Blue Chip estimates remain around 3 percent (SAAR) for the rest of 2014, and fiscal drag is waning. Headwinds to growth come from political upheaval in Ukraine and slowing emerging markets.
- Heating degree days is the temperature difference between 65 degrees and the average of the daily high and low temperature, provided the average is less than 65 degrees. Daily figures are summed to get heating degree months, years, etc., and are weighted by population to get an accurate idea of total energy demand for heating in a region.
- “NESIS scores are a function of the size of the area affected, amount of snow and the population living in the path of the storm,” according to the National Climatic Data Center, www.ncdc.noaa.gov/snow-and-ice/rsi/nesis.
- “Forecasting Inflation,” by J. Faust and J. Wright, in Handbook of Economic Forecasting, G. Elliott and A. Timmermann, eds., vol. 2a, Amsterdam: Elsevier North-Holland, 2013, pp. 3–56.
About the Author
Cornwell is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.