Fed Beige Book Confirms Weather Stomped on U.S. Economy in Early 2014
“Weather” was referenced 119 times in the Federal Reserve’s beige book report. While that is by no means excessive for a document with a word count running in the tens of thousands, its high usage confirms what many economic reports have already indicated: frigid temperatures caused U.S. manufacturing output to record its biggest decrease in more than 4-1/2 years in January; kept job creation weak in December, January, and likely February; contributed to a slowing in consumer spending over the past two months; and handed residential construction a hit, with January housing starts dropping to their lowest levels in almost three years. Similarly, the Fed’s reported noted that, “As severe winter weather limited [consumer] activity,” retail sales growth weakened since the previous report for most districts; manufacturing sales and production in several Districts were negatively impacted by “severe winter weather”; “severe weather conditions” resulted in softer vehicle sales; residential housing market faltered in several districts because of the “unusually severe winter weather conditions — and the list goes on.
To put the Fed’s use of the word “weather” into perspective, “growth” was mentioned 80 times, “economy” saw seven mentions, and the “Super Bowl” saw four.
Still, despite the frigid temperatures that impeded hiring, kept consumers at home, and disrupted supply chains, eight of the Federal Reserve’s twelve districts reported economic activity was “improved,” although, in most cases, the “increases were characterized as modest to moderate.” Many of these districts saw economic benefits from tourism as ski resorts saw high traffic. Only the New York and Philadelphia Federal Reserve banks recorded a slight decline in economic activity, thanks to the “unusually severe weather” experienced in those regions, while growth in the Chicago district slowed and conditions in Kansas city remained unchanged.
For nearly all of 2013 — the adjectives most commonly employed by the Federal Reserve to describe the progress of the United States economic recovery were “modest” and “moderate.” For lay readers of the beige book report, those terms are not only hard to distinguish between but they are both extremely vague in nature. But, of course, these negatives are inescapable; terms like “modest” and “moderate” stand in for a numeric index, which would make the Fed’s reports much easier to summarize. Instead, the central bank’s summary of current economic conditions allow for a more detailed picture, from which trends in consumer spending, manufacturing, and real estate can be picked out. Named for the color of its cover, the beige book report, released every six weeks, provides an anecdotal snapshot of the economy.
It seems “modest to moderate growth” can cover all manner of ills and smooth out any improvements (or negative developments) that transpire between reports. The particular meaning of those to adjectives can also seem a bit ambiguous, but “modest” is meant to be a touch weaker than “moderate.” According to a Wall Street Journal analysis of the Fed’s use of the two terms, “modest” economic growth has a threshold of slightly below 2 percent gross domestic product growth, “though it doesn’t seem to be an exact science.” Even after the “fedspeak” analysis from the Journal, the question of what exactly constitutes “modest to moderate growth” fails to create a solid storyline. But, the point of the Fed beige book is not to be a scientific analysis of economic growth but rather an anecdotal description of economic conditions. February’s data indicated that a greater number regions experienced steady or “moderate” growth rates than experienced slower or “modest” expansion.
Staffers from each of the 12 regional banks compile anecdotes, rather than pure data, by conducting interviews with businesses, economists, and other financial experts via phone or through questionnaires or email, with the intention of detecting important trends in consumer spending, manufacturing, real estate, and business investment. Each survey focuses in particular to the region’s major industries; the Atlanta Fed highlights the regions tourism, the Dallas Fed on the energy industry, and the Kansas City Fed on farming. Recently, all regions have placed additional attention on consumer spending in all regions. Consumer spending accounts for approximately 70 percent of gross domestic product and because government and business spending have remained weak, the economy is depending even more on household spending to fuel growth.
The March beige book report will leave Federal Reserve policy makers and Chair Janet Yellen to determine whether lower-than-expected economic growth is the result of cold weather or fundamental structural problems. The summary is also key information for the Federal Reserve policymakers to analyze when considering whether to further dial back the central bank’s monetary stimulus program. Wednesday’s beige book release comes two weeks before the Fed’s March 18 through 19 policy meeting, at which time policymakers will decide how to precede with plans to lower the monthly bond-buying program, which was designed to decrease borrowing costs in order to boost stronger spending, hiring, and growth. Whether the Fed tapers the program by another $10 billion this month is highly dependent on improvements in the labor market. During a December 18 press conference that followed the Federal Reserve’s regularly scheduled Free Open Market Committee Meeting, then-Chair Ben Bernanke announced that the central bank would begin scaling back its stimulus program by $10 billion beginning in January.
“Unseasonably cold weather has played some role,” Yellen said in reply to a question during February 27 testimony to a Senate committee, explaining the weakness exhibited by several recent economic reports. “What we need to do, and will be doing in the weeks ahead, is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”
Economists received further evidence of weather-induced weakness in Wednesday employment report from payroll processor ADP. December, January, and now February have seen levels of job creation far too low to dig the U.S. economy out of the crater in the labor market created by the financial crisis and Great Recession. With the release of payroll processor ADP’s National Employment Report for the month of February, economists were given a sign that employment gains were weak in the first months of the year, with U.S. private-sector employers adding just 139,000 jobs to payrolls — a figure well below the 12-month average, according to ADP Chief Executive Carlos Rodriguez. As in previous months, Moody’s Analytics chief economist Mark Zandi, whose firm helps compile payroll processor monthly tally, blamed frigid temperatures, not underlying economic trends, for the poor growth.
District summaries were light on mentions of employment gains, although generally, the report noted that, “The market continues to improve gradually, though weather appears to have been somewhat of a deterrent to hiring.”
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