Harsh Weather Tests Optimism over U.S. Economy

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February 25, 2014 3:06 PM EST

Unusually cold weather will take a bite out of U.S. economic growth this quarter, but a rebound seems likely on the horizon and expectations for stronger growth this year have not changed.


US GDP expanded by 2.5% in the second quarter, quicker than previously thought (Reuters)

Economists estimate that freezing temperatures and the ice and snow storms that have blanketed much of the nation will shave as much as half a percentage point from gross domestic product in the first quarter.

That comes on top of the drag from efforts by businesses to sell off bloated inventories and a one-time hit from the expiration of benefits for the long-term unemployed.

"The slowdown is testing everyone's optimism about the economy, but so far it's just a soft patch. The economy will regain strength," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania. "Outside housing, we don't believe the recent data signal a change in fundamentals."

Moody's Analytics is keeping its 3.1 percent estimate for 2014 growth and most other economists are sticking with their full-year forecasts as well, despite data from retail sales to manufacturing and employment that show the economy braked sharply in January.

While housing also took a hit from bad weather, it was already cooling because of higher mortgage rates, a lack of properties to buy, and labor and building material shortages.

And the run of weak data looks set to persist, with severe weather again dominating in February.

"Weather can ... affect the economic data when it departs significantly from seasonal norms," said David Mericle, an economist at Goldman Sachs in New York. "February looks likely to be the harshest month of all this winter, suggesting the worst might be yet to come."

Goldman Sachs expects weather to cut a bit more than 0.5 percentage point off first quarter growth. But Mericle said they look for a bounce back of 0.5 to 0.75 percentage point in the second quarter.

LOSS OF MOMENTUM

First-quarter GDP growth estimates are currently pegged at or below a 2 percent annual rate, but weather is only part of the story. In addition to housing, consumer spending was also already ebbing late last year.

Not only were retail sales in November and December not as strong as had been thought, export growth has been less stellar as well. Many economists now anticipate the fourth-quarter's 3.2 percent growth pace will be cut to about a 2.5 percent rate when the government revises the data on Friday.

Other factors restraining growth, which economists had already factored into their estimates, include unsustainably high inventories, the end of jobless benefits for more than 1 million people in December, and cuts to food stamps.

Businesses that are working through piles of stocks amassed in the second half of last year are placing fewer orders with manufacturers, which has fueled weakness in factory production.

"A step-down in the pace of inventory accumulation was an inevitable headwind to growth in the first quarter," said Michael Feroli, an economist at JPMorgan in New York.

Inventories are expected to cut off anywhere between 0.5 and 1.0 percentage point from first-quarter GDP.

As for the cuts to jobless benefits and food stamps, they are forecast to take away between 0.2 and 0.4 percentage points.

Most economists believe that the setback this quarter is temporary and expect GDP growth this year will be the strongest since the end of the recession almost five years ago.

But a few, like RBC Capital chief U.S. economist Tom Porcelli, say the economy never had any significant momentum and severe weather could be masking some underlying weakness.

"The rates of growth that we witnessed in the tail end of 2013 are not indicative of the true underlying potential of the economy, which remains of the 2-2.5 percent variety," said Porcelli. "We are also witnessing a reversal to the reality of lackluster growth."

(Photo: / )
US GDP expanded by 2.5% in the second quarter, quicker than previously thought (Reuters)
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