- Temperature in the US only a little below average, but more extreme conditions in the East
- Extreme weather events have tended to have a temporary effect on indicators
- FOMC minutes have a slightly hawkish tilt as barrier to stopping tapering is high
Close to average, but sharp regional divides
In today’s daily, we try to assess to what extent the winter weather in the US has been responsible for the latest string of weaker-than-expected numbers. According to data from the National Oceanic and Atmospheric Administration, this winter has not been abnormally cold, nor were there unusually high levels of precipitation. In fact, December was even slightly warmer than normally is the case, while January was close to its historical average. However, in December, the North, West and South of the US experienced unseasonably cold winter weather, though precipitation levels were not unusually large. In contrast, the Eastern states experienced warmer than normal weather, but also saw higher precipitation levels. In January, the West enjoyed relatively mild and dry winter weather, but the Eastern States went through extremely cold winter weather. The upshot is that in both December and January, large parts of the country experienced unseasonably harsh winter weather, which we suspect – at least partly – disrupted economic activity.
Evidence of temporary impact on surveys
The economic impact of extreme weather in certain parts of the country might be most akin to that of a hurricane. We have looked at the average pattern of various monthly indicators during three past hurricanes (Hurricane Andrew in August 1992, Hurricane Katrina in 2005 and Hurricane Sandy in October 2012). Overall, the evidence signals some temporary effect on the economy from these events, but a couple of indicators show little impact. Starting with the survey evidence, both the ISM manufacturing index and the Conference Board’s consumer confidence index declined in the month of (or that following) the hurricane. However, both indicators recovered to above the previous level within a few months of the hurricane (see chart). The trend of hard data during the hurricane period is more mixed. Retail sales tended to decline during the hurricane, but there is little visible impact on manufacturing production and private nonfarm employment. Overall, then the impact of weather in the past is not clear cut but there does appear to have been a temporary effect on some key indicators. Given that fundamentals are healthy, we similarly think that the weakness we have seen in recent data is most likely weather related and should rebound once the weather shows more normal patterns.
FOMC minutes have a somewhat hawkish slant
The minutes of the FOMC’s January meeting suggested that the bar for the Fed to stop tapering its asset purchases is high. The minutes recorded that ‘several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting’. Meanwhile, the FOMC also looks like to change its forward guidance given the recent sharper than expected drop in the unemployment rate, though there seems to be no clear agreement yet on how. According to the minutes “some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the Committee’s policy decisions”. At the same time, there were proposals from ‘several participants’ to also link forward guidance to risks to financial stability, while ‘several’ judged that the FOMC should signal its ‘willingness to keep rates low if inflation were to remain persistently below the Committee’s 2 percent longer-run objective’. Either way, it seems clear that the Fed wants to keep market expectations of rate hikes out into the future. However, there appears to be a hawkish minority that is considering an earlier move. Indeed, ‘a few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon’. Our central view is that the policy rate will be hiked in mid-2015.