Since the beginning of the year, the pace of growth in numerous US economic indicators deteriorated significantly, so much so that many of these metrics even fell short of economists’ expectations.
Weirdly, the pace of jobs growth had been resilient even amid unexpected plunges in key measures like retail sales and durable goods orders, reports which reflected weakness in both consumers and businesses.
However, this weirdness has begun to work itself out.
On Friday, we learned the US economy added just 126,000 jobs in March, missing expectations for 245,000 new jobs. You have to go all the way back to December 2013 to see a number that low. Even worse, the prior two months worth of job creation was revised down by 69,000.
All of this comes as the Federal Reserve considers when it will begin tightening monetary policy with interest rate hikes. Simply put, the stronger the economy looks, the more likely it is the Fed hikes rates sooner than later.
“We continue to forecast the first hike in the fed funds target range at the September meeting,” Goldman Sachs’ Jan Hatzius and Kris Dawsey wrote on Friday. “However, [Friday’s payroll] number adds to the risk of a later hike.”
Why’s the economy slowing?
Among other things, US consumers have been increasingly saving their money rather than spending today. Even much of the gasoline savings, which economists expected to be a big spending stimulus, does not seem to be flowing back into the economy.
This is a big deal as personal consumption accounts for over two-thirds of US GDP.
Maybe it’s just the weather
For now, most economists are comfortable explaining much of the currently slowdown on the disruption tied to the unusually harsh winter on the East coast.
“We believe that much of the slowdown in growth momentum Q1 will be transitory and related to adverse weather,” Barclays’ Blerina Uruci said. “Lower temperatures and higher snowfall than historical norms likely hindered activity and much of the downside data surprises we have seen for Q1 seem to be explained by it.”
Uruci offered the chart below, illustrating that economic reports have historically fallen short of economists’ expectations on during periods when the weather was colder than usual.
NOTE: There’s an important distinction between bad economists and a bad economy
Keep in mind that just because economic data misses expectations, it doesn’t mean the economy is actually tanking.
In fact, economists have a long history of being too optimistic in there outlooks for the economy. So, it shouldn’t be a big surprise when data surprises to the downside.
As for the economy itself, despite some slowing, it’s hard to argue that the economy is in bad shape.
“[I]t is too early to call for a highly disappointing US year in terms of growth, jobs and wages,” Mohamed El-Erian wrote on Business Insider on Sunday. “The economy continues to heal from the shock of the global financial crisis and prior mal-investments in a wrong growth model. There are some exciting innovations that are in the process of “going macro” — that is transitioning from being influential at the company and sector levels to beneficially impacting the whole economy. Companies still have lots of cash on their balance sheets whose deployment on productive uses would make a significant economic impact. And even Friday’s disappointing jobs report had an important silver lining — the modest pickup in wage growth.”
El-Erian argued that if the Fed’s decisions about monetary policy were only about the economy, then it would likely have the confidence to tighten policy and hike rates sooner than later.
For now, we’ll all be waiting anxiously to see if the economy does indeed come back as the weather becomes more favourable.