Mother Nature's Bail Out Coming To An End
We have been reporting since December about the potential impact of the weather (Retail Sales and Employment) on the economic numbers. Those impacts ranged not only from borrowing from the future growth but also by skewing the underlying data due to how seasonal adjustment formulas work.
The chart is a composite of the Chicago, Richmond, New York, Philadelphia, Dallas and Kansas Federal Reserve regions plus the ISM Manufacturing and Non-Manufacturing Index. These reports all showed continued strength through the winter months as the warmest winter in 65 years allowed manufacturing to operate at higher levels than normal. However, those small increases were magnified by the seasonal adjustments that were added to account for normal seasonal weakness when individuals can't make it to work. Unfortunately, the "sugar coating" of the weather adjustments as the seasonal weather patterns return to normalcy will expose the bitter center. We have already seen it accross the manufacturing reports and indications point to continued weakness ahead.
A second impact of the warmer seasonal weather is that it borrowed from future growth. Housing starts today dropped like a stone even as we enter into what should normally be a very strong time of the year for home building. Normally, March should be the beginning of a ramp up for building now that workers can start returning to work and building can resume with better weather working into the backlog built up during the winter. The problem is that there is no backlog to fill.
Warmer weather has also impacted the employment data. With a lack of inclement weather that would normally keep individuals from getting to work combined with 4.47 million employees in first 3 months of 2012 - the employment data in recent months has been much stronger than we would have seen during a normal winter season. It is very likely in coming months that we will see a near 50% contraction in the employment reports as the seasonal adjustments begin to subtract jobs from a weak employment environment.
Of course, while we have been discussing this for the past several months, the media ballyhooed the "stronger" numbers during the winter period and dismissed the weather impact entirely. Now that more than 70% of recent economic reports have missed estimates they are quickly blaming the weather as the reason.
The Fed and the Administration should be on their knees and giving thanks for the blessings they have received for the economy over the past 9 months. First, falling oil prices last summer gave individuals an effective $60 billion tax cut. Then during the winter where normally heaters are turned up to stave off the wintery blasts the balmy winter added roughly $30 billion to consumer's wallets due to decreased utility costs. Those impacts gave individuals more dollars to spend and when combined with seasonal adjustments it gave the illusion of a strongly recovering economy.
With "Operation Twist" now rapidly coming to an end and the Fed apparently in a trap of rising inflation I am not sure what the next "support" for the economy will be. My expectation continues to be that the economy will continue to run at a sub-par growth rate though the end of 2012 and that we could see a recession by the end of 2012 or by mid-2013. Of course, that is assuming we are boosted by further rounds of artificial intervention by the Fed or Mother Nature.