The blindfolded economist

by: Han de Jong

Continued adverse weather conditions in the US are making it impossible to interpret the US economic data. Being blindfolded like this is always unwelcome, but it comes at a particularly inconvenient time as the data should be telling us whether the acceleration in growth that came through in the second half of last year can be maintained. It would be nice to be sure, as continued strong growth is necessary to support corporate profits, which are necessary to sustain the bull run on the equity market. Bond yields have fallen in recent weeks, but strong growth data should push them back up again. Here too, we have poor visibility. In addition, while the eurozone economy seems to be able to stand on its own feet, the pressure on emerging markets could be relieved if these economies were supported by continued, and preferably further accelerating growth in the US. Having been on the optimistic side of this debate for some time, we have little option but to stay where we are. When weather conditions in the US normalise, we expect to see some positive payback for poor data currently coming through.

Vision impaired

As an economist, I follow a large number of economic data releases. They are all small pieces of a large puzzle, which can be called the global economic situation, or even outlook. It is my job to put the pieces together and tell others what the total picture looks like before the puzzle is completely finished. In fact, the challenge is to be able to do that using as few as possible pieces. When all the pieces are in place, you don’t need me to tell you what you are looking at. Under normal conditions, you can never find all the pieces and they often do not seem to fit together. So you have to decide which pieces are more important than others and what they are telling you.

Data releases can give wrong messages for a variety of reasons. One of these involves unusual weather conditions. The US has been plagued by bouts of abnormally severe winter since late last year. This disrupts public life and, thus, economic activity. The problem is that it is impossible to tell to what extent the weather has distorted the data.

This uncertainty means that we cannot fully answer really important questions. The US economy grew relatively strongly in the second half of last year and confidence indicators suggest that momentum should remain strong. In fact, our forecasts for 2014 include a further acceleration of growth. On this basis, we expect corporate profit growth to strengthen, which we think will be crucially important if the bull run on the equity market is to be continued. In our view, bond yields are expected to rise gradually in the course of the year in response to stronger economic growth. We have seen considerable weakness in economic data, mostly in the US, but we do not know whether that weakness is purely down to the weather or if the economy has entered a growth pause. In addition, we think that strong growth in the US is crucial to emerging economies. Several emerging countries have tightened (monetary) policy, and stronger world trade growth would be hugely welcome to them. Alas, recent data releases do not allow us a clear view on these issues.

US weakness, though with some exceptions

Last week saw some clearly weather-affected disappointments. US January retail sales were down 0.4% mom. Worryingly, data for previous months was revised lower. Industrial output was also down: -0.3% mom and manufacturing output was even 0.8% lower than in December. The report was accompanied by strong references to the weather. But what the number would have been given normal winter weather we do not know. Retail sales and industrial output are important, hard economic data. Some softer data was clearly more encouraging. The NFIB survey of business confidence among small US businesses edged higher again in January. The detail suggests that hiring is picking up. Initial jobless claims, for some reason, do not seem to have been affected particularly strongly recently. Last week’s number was 339,000, not far off the four-week average. It is a bit of a puzzle why the claims data would not be affected strongly by the weather. Or are there compensation distortions? A drop in hiring should have pushed the claims data up, but perhaps the weather kept people indoors and they simply did not get out to register. Or are the data we are looking at distorted and can we expect a significant drop once the economy returns to normal?

Under such conditions, we cannot assess whether our optimistic economic scenario is still justified. We therefore take the view that economic data will bounce back strongly once the weather settles back to a more normal pattern. Fingers crossed.

Fed chair Janet Yellen made her first visit to Congress for the semi-annual testimony. She did well as she spoke with more confidence that her predecessor (who could come across as surprisingly nervous) and she used language that was much easier to understand than her two most recent predecessors. She stressed continuity, and it is clear that the Fed will only deviate from its chosen path of reducing asset purchases by USD 10 bn per month if the economic outlook changes very materially.

Mixed data elsewhere too

Eurozone Q4 GDP surprised positively, growing by 0.3% qoq and 0.5% yoy, the first positive yoy reading for some time. Of the peripheral countries for which data was published, Portugal is particularly worth highlighting. That country registered its third consecutive positive quarterly growth number and its yoy rate of growth now stands at +1.6%, after -4.0% in Q1. That is an impressive performance.

I have long argued that the eurozone may be the economy that surprises most positively this year. Bear in mind, I am not saying that Europe will put in the strongest growth performance, but expectations are so low that it must be possible to beat these depressed sentiments. As the eurozone economy is leaving the crisis behind, it is managing to relink to the global economic cycle. I still feel, however, that the expensive euro continues to be a burden and one would hope that the ECB will be willing and able to develop and implement policy actions that will bring the euro to a somewhat more realistic level.

Eurozone industrial production data for December disappointed. Output fell 0.7% mom, after a rise of 1.6% in November. The yoy rate fell back from +2.8% in November to a meagre 0.5% in December. Industrial production is a volatile series in the eurozone, so it is important to focus on the trend and not on the sharp twists and turns of the monthly data. Nevertheless, the December numbers disappointed.

Italian prime minister Enrico Letta resigned and will most likely be succeeded by Matteo Renzi, the mayor of Florence and party leader of the PD. Renzi is an energetic politician and relatively young to be prime minister. He talks about making changes quickly in Italy. That is indeed what needs to happen, but it remains to be seen if Renzi can find the parliamentary and popular support to implement so much change so quickly.

Meanwhile the French budget watchdog, founded in 2012, is starting to growl at the government. One would hope that the response will be that reform is accelerated.

Last, Germany’s constitutional court effectively deemed the ECB’s OMT (outright monetary transactions) a violation of the treaty on which the ECB is based. Commentators are in disagreement about how relevant this is. The Karlsruhe court essentially referred the case to the European Court of Justice in Luxembourg. I think that whatever happens, the ECB will find ways to do what is necessary to save the euro. As economic conditions are improving, chances that the ECB will have to use controversial instruments are diminishing anyway, making the Karlsruhe ruling a bit of an irrelevant sideshow.


Data outside the eurozone and the US was relatively scarce last week. There was some disappointing data in Japan on business and consumer confidence while machine orders were also soft. In contrast, Chinese January export and import data for January was stronger than expected. This is consistent with our expectation of stronger global trade growth which is based on various leading indicators. But to be honest, one must be careful reading too much into Chinese monthly trade data as it can be volatile. In addition, the data can be affected by over or underreporting and Chinese New Year can wrong-foot the statistics this time of year.