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By HaleStewart April 30, 2014 10:58 am
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1Q US GDP: Blame the Weather

Let's begin with this statement from Fed Chair Yellen on February 27

The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked up again this year.

And consider this statement from April 16

The FOMC's current outlook for continued, moderate growth is little changed from last fall. In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook. The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related.

There has been a fair amount of discussion in economic circles regarding the effect of the very adverse US weather during the first quarter.  And, remember that Fed officials can be just as wrong in their analysis as anybody else.   But, while it will probably be impossible to discern the impact of these developments on the data, the underlying numbers of the GDP report support this conclusion.

Let's begin with personal consumption expenditures, or PCEs:

Real personal consumption expenditures increased 3.0 percent in the first quarter, compared with an increase of 3.3 percent in the fourth.  Durable goods increased 0.8 percent, compared with an increase of 2.8 percent.  Nondurable goods increased 0.1 percent, compared with an increase of 2.9 percent. Services increased 4.4 percent, compared with an increase of 3.5 percent.

These numbers indicate that shopping related activity declined: both durable goods and non-durable goods purchases decreased.  These items are usually purchased when individuals go to a "brick and mortar" locations.  However, the adverse weather most likely delayed or outright prevented some of that activity.  Notice, however, the services increased smartly. 

One of the real tells supporting the weather hypothesis is the information regarding investment:

Real nonresidential fixed investment decreased 2.1 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth.  Nonresidential structures increased 0.2 percent, in contrast to a decrease of 1.8 percent.  Equipment decreased 5.5 percent, in contrast to an increase of 10.9 percent. Intellectual property products increased 1.5 percent, compared with an increase of 4.0 percent.  Real residential fixed investment decreased 5.7 percent, compared with a decrease of 7.9 percent.

Notice that items directly effected by the weather largely dropped: equipment has to be moved  from point A to point B, a task which is difficult to do in a blizzard.  Secondly, residential construction declined as well, but, again, it's difficult to start building a house in adverse building conditions.  In contrast, intellectual property investment -- a largely indoor activity -- increased 1.5%.

Finally, we have exports, which decreased 7.6%.  But, as with a durable goods investment, exports have to be moved which is difficult in snowy conditions.

Recent numbers also highlight a 2Q turnaround.  The latest durable goods number increased 2.6%, while both industrial production and capacity utilization were up.  Both ISM numbers (manufacturing and services) are in positive territory.  And consider the following anecdotal reports from the latest ISM manufacturing report:

    "Seeing improvement in the overall economy. Hearing strong bookings in     residential contractor and home repair work." (Paper Products)

    "First quarter business still strong." (Fabricated Metal Products)
    "Business beginning to heat-up, along with the weather." (Petroleum & Coal Products)
    "Business is good and we are optimistic that orders will continue to come in at a decent pace." (Transportation Equipment)
    "Year starting off very good. Outlook very bright for 2014." (Computer & Electronic Products)
    "Export orders are picking up — volume is improving although pricing, and thus profitability, are still challenged. Domestic business seems to be holding steady despite earlier predicted declines." (Chemical Products)
    "Short supply of hardwood lumber continues to challenge sales' ability to maximize volume targets. Demand is sound." (Wood Products)
    "Weather has created major delays on inbound materials and outbound sales. We need spring." (Food, Beverage & Tobacco Products)
    "Economy is looking positive and commodities are stable." (Machinery)
    "Business continues to improve." (Furniture & Related Products)

All the reports are positive while one specifically mentions weather related problems slowing business.

In reality, we won't know if the weak first quarter numbers are really the result of weather related problems until we see the second quarter GDP.  But a look at the internals does support this view.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 



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