Eight times a year, the Federal Reserve releases the Beige Book, a lengthy report on US economic activity that collates information collected from interviews of economists, business leaders and market experts in the 12 Federal Reserve districts.
The information presented in these reports is qualitative and anecdotal, making it difficult to compare a particular release to consensus market expectations.
But the intelligence gleaned from Beige Book can be just as valuable as the government’s monthly employment release or the latest data on inflation and economic growth. The key theme of the Fed’s most recent release: weather. The word appeared 99 times in the Beige Book that the Fed published on March 5, compared to 18 times in the report issued last year.
Most Fed districts reported that extremely cold weather and a series of winter storms in the Northeast and upper Midwest slowed consumer spending, construction and manufacturing activity in January and February, obfuscating strengthening underlying economic trends.
An Unwelcome Gift
According to the Beige Book, the majority of Fed districts reported a slowdown in retail and tourism sales between January and early February. The New York Fed district reported “noticeable weakness,” while Richmond, St. Louis and Minneapolis noted that sales growth moderated in their districts.
This excerpt from the New York Fed district’s commentary sums up the weather’s economic impact on the retail industry:
General merchandise retailers report that sales weakened noticeably in early 2014, running below plan and well below year-ago levels. Two major retail chains indicate that sales during the first six weeks of the year were down sharply from comparable 2013 levels, mainly due to the weather.
One contact notes exceptionally low gift card redemptions—viewed as a likely harbinger that much of the shortfall in sales will be made up when warmer weather arrives. Similarly, contacts at major malls in upstate New York report that sales were weak in January and early February, due largely to heavy snow and extremely cold weather, particularly during weekends.
Not surprisingly, one category that has performed reasonably well is cold-weather outerwear. Inventories are mostly at or modestly above desired levels. Prices are reported to be little changed, though some retail contacts describe the environment as increasingly promotional.
Poor sales results from some of the largest US retailers helped to fuel the stock market’s selloff in late January and early February. And despite the recent rally, the S&P Retail Select Industry Index has lagged the S&P 500 by about 3 percent so in 2014.
The New York Fed’s comment on weak gift-card redemptions is particularly instructive.
According to a poll conducted by the National Retail Foundation, eight in 10 consumers surveyed indicated that they purchased gift cards during the 2013 holiday season, corroborating estimates that consumers purchased a record $29.8 billion worth of gift cards last holiday. That’s about 5 percent of total holiday retail sales.
Pessimists have argued that disappointing retail sales over the past two months reflect a softening economy and a weak jobs market.
But weakness in the economy and personal income shouldn’t have any bearing on gift-card redemptions; these cards can only be used to purchase items from the issuing retailer and can’t be redeemed for cash.
Many consumers use their gift cards early in the new year, when they return unwanted items to retailers. Against this backdrop, the downturn in gift-card transactions suggests that inclement weather kept many consumers at home.
And these sales aren’t lost. As soon as weather conditions improve, consumers will spend their gift-card balances and complete some of the shopping they skipped in January and early February.
It’s also instructive that the Beige Book highlighted particularly weak sales in upstate New York–the region most acutely impacted by severe winter weather.
The Purchasing Managers Index (PMI) for the US manufacturing sector plummeted to 51.3 in January from 56.5 in December. Readings greater than 56 imply economic growth of more than 3 percent; a PMI value of 51 to 52 suggests a far more modest expansion, similar to what the US has experienced over the past two years.
Although February’s PMI reading of 53.2 is encouraging, the Beige Book offered more color on trends under way in the US manufacturing sector:
Manufacturing activity expanded at a moderate pace from January through early February in most Districts. Several Districts reported that severe winter weather had a negative effect on sales and production during this period, including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Dallas. The weather was cited to have caused utility outages, disrupted supply chains and production schedules, and resulted in a slowing of sales to affected customers.
Philadelphia and Richmond reported that shipments and orders declined during the first half of February. Steel producers in Cleveland indicated that they have excess capacity, and San Francisco reported low capacity utilization rates at steel mills.
Power outages and supply-chain disruptions–especially on the Eastern Seaboard and in the upper Midwest–appear to be behind January’s disappointing PMI reading.
These challenges likely continued into early March. But with the extremely cold 2013-14 winter finally breaking, look for PMI to rebound sharply this spring as firms get their production schedules and supply chains back on track.
Although the temporary dip in activity will slow US economic growth in the first quarter of 2014, the second quarter should bring a bit of a snapback. More important, US economic growth should trend closer to 3 percent by the end of 2014–an appreciable improvement from recent years.
The Employment Situation
Last month’s employment data gave investors more reason for cheer. US private nonfarm payrolls surged by 162,000–well ahead of consensus expectations for a 145,000 new jobs. The Bureau of Labor Statistics also raised its estimate of payrolls growth for the preceding two months by 25,000.
Although the addition of 162,000 nonfarm payrolls remains well below the gains one would expect if US gross domestic product were growing at an annualized pace of 3 percent, February’s inclement weather likely depressed this number from its normal run rate.
In February, more than 600,000 US workers missed work because of bad weather, compared to 237,000 in February 2013, 178,000 in February 2012 and 395,000 in February 2011. Seasonal adjustments to the monthly data series fail to account for the coldest winter in more than a decade.
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