The recent slowdown in economic activity has many investors reassessing the positive outlook on the U.S. economy that seemed to be the consensus view headed into 2014.
Unseasonally harsh winter weather has caused disruptions across the country over the last two months, and has been assigned some of the blame for the weakness in December and January economic data points like employment, retail sales, housing, construction, and industrial production.
Goldman Sachs economist David Mericle estimates a little more than half of the slowdown can be accounted for by the effects of extreme weather.
After all, as Mericle puts it, “Snowstorms have been more frequent than usual: of the 52 snowstorms ranked as high-impact on the NESIS scale since 1956, five have occurred this winter.”
Aside from bad weather, however, there are likely a few other forces at work causing the economy to slow.
“We see much of the recent weakness as payback for unsustainably strong growth in the second half of last year,” say JPMorgan economists Michael Feroli and Robert Mellman.
“In particular, a step-down in the pace of inventory accumulation was an inevitable headwind to growth in the first quarter, and the rate of export growth also appeared due for a pullback. While that was expected, and built into our forecast, two unforeseen developments may also be weighing on aggregate expenditures early this year. First, contrary to most expectations Congress did not reauthorize extended unemployment benefits, thereby depressing income and perhaps spending growth early this year, and second, the lapsing of favourable tax treatment for capital spending may have had a greater impact than we estimated in pulling forward capex into 2013.”
As Feroli and Mellman point out, the inventory story is fairly well known, given that an acceleration in stockbuilding was a major driver of GDP growth in the second half of 2013.
“Inventory investment can’t keep accelerating every quarter,” says Ethan Harris, an economist at BofA Merrill Lynch.
“Assuming a stable inventory-sales ratio and assuming steady growth in final sales of about 3.5%, inventories should be growing about $US60 billion per quarter. In other words, in Q4 inventories were growing about $US67 billion faster than is sustainable over the medium-term. Getting from here to there would mean a 1.7 percentage point headwind to growth over the coming quarters. The correction could be even more severe if the recent inventory building is unintended, triggering below-normal inventory building later.”
The other two factors cited by Feroli and Mellman — the expiration of emergency unemployment compensation and the expiration of tax credits that allowed companies to write off 50% of equipment purchases as an incentive to boost capital expenditure — are a bit harder to analyse at this stage.
In fact, if the January jobs report is any indication, the former development may have actually given some of the employment metrics a boost. However, it is also easy to see the negative impact such an event could have on consumer spending, for example.
The effects of the latter development — the expiration of business investment tax credits — seem equally unclear for the time being.
This did appear to be the story of the November durable goods orders data, which showed an explosion in core capex when the numbers were first reported in December, suggesting companies were pulling spending forward to take advantage of the program.
However, the release of December durable goods orders data in January subsequently revised away nearly half of the November rise in spending on core capex, while December registered an outright decline.
January durable goods orders data will be released on Thursday at 8:30 AM ET. Economists predict another decline. Pay attention to revisions to the December data — they could shed more light on the effects of the expiring tax credit on business investment.
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