Let’s not get carried away with blaming all of the economic weakness on the weather. While weather was undoubtedly a factor, the economy was still stuck in a rut prior to the drop in temperatures and heavy snowfalls. The minor bump in economic growth from mid-to-late 2013 was within the confines of the approximate 2% rate evident for the last three years. There have been times when growth was somewhat above that level and other times when it was below, but has never broken into the clear on the upside. The Fed’s tapering policy was started not because growth was suddenly accelerating, but because Quantitative Easing (QE) was losing its effectiveness at the same time that unintended and unwanted negative consequences began to look more likely. A return to more normal weather will probably give us another minor bump that is highly unlikely to signify a renewed economic acceleration.
January retail sales, reported Thursday, were down 0.4% month-to-month, partially reflecting bad weather. But December sales were downwardly revised to minus 0.1%, reflecting poor holiday sales that left retailers with higher than desired inventories that will have to be worked off. It is important to recognise, however, that retail sales growth has been trending down for some time. On a year-over-year basis, they peaked in July 2011 at 8.5%, and gradually dropped to 3.2% in March 2013. After jumping back to 6% in June, it subsequently declined to 3.1% in December.
Payroll employment followed a similar pattern, peaking at 1.9% year-to-year in March 2012 and declining to 1.5% by March 2013. In December it was 1.7%. The key takeaway though, is that job growth has never broken out into new high territory during the entire recovery. It is notable that in prior economic expansions year-over-year job growth has reached between 3.5% and 5% in numerous months, a mark that has not even been closely approached in the current tepid recovery.
While weather has undoubtedly been a factor, it seems clear that the economy has been stuck in an approximate 2% growth trend, sometimes slightly more and sometimes slightly less. Although we could see another minor growth bump as the weather clears, the economy is unlikely to accelerate. The latest savings rate is down to 3.9%, the second lowest monthly rate in six years, and real disposable income is barely rising. The Fed’s tapering policy is not based on renewed economic growth, but on the widespread belief that it is losing its effectiveness at the same time that the risks of unwanted consequences are rising.
In sum, we believe that economic growth will continue to be disappointing at a time when QE can no longer be relied upon to provide a floor under the stock market. It seems to us that the risks are high in the period ahead.