Just
Warming Up
The
February employment report and the economic data for February in China are the
highlights on this week’s economic and policy calendar. In addition, the
February data on ADP employment, layoff announcements, and merchandise trade
for January are due out in the United States. The week will likely be quiet for
the Fed, as Fed officials observe the unofficial "quiet period" ahead
of the next Federal Open Market Committee (FOMC) meeting on March 13. However,
central banks outside the United States will be busy this week, with rate
setting meetings in Brazil, Australia, New Zealand, Russia, South Korea, the
Eurozone, the UK, Peru, Canada, Poland, Indonesia, and Malaysia. Of these, only
Brazil is expected to cut rates. The rest of these central banks are on hold,
for now. There are bond auctions in Austria, the Netherlands, Germany and
Belgium, as investors await the March 8 deadline to swap out existing Greek
debt for newly issued debt as part of the latest bailout.
The
Chinese authorities will begin to release China's economic data for February
later this week, with the key report being the Consumer Price Index (CPI)
report. A deceleration in the CPI in February could pave the way for the China
central bank to continue to ease monetary policy in the coming weeks and
months. All of the Chinese economic reports for February will be impacted by
the shift in the Lunar New Year to January this year versus February in 2011.
Warm Weather Impacting Economic Activity in Early 2012
On
balance, the vast majority of the economic data in the United States released
since early October 2011 has exceeded expectations. This trend reflects
underlying improvement in the overall economy due to:
·
Less
uncertainty surrounding the debt issues in Europe
·
A
little less rancor (and a little more cooperation) out of Washington compared
to this past summer
·
The
improving job market as companies have reached the limit on productivity gains
·
A
rebound in global economic activity following the global supply chain
disruptions that resulted from the Japanese earthquake and tsunami in March
2011.
At
least some of the improvement in the economic backdrop may be associated with
the weather, which has been warmer and drier than usual since last autumn. In
general, warmer (and drier) than normal weather tends to boost economic
activity. We saw evidence of these trends in the details of the Federal
Reserve’s (Fed) latest Beige Book — a qualitative assessment of business and
banking conditions compiled via contacts in the private sector in each Fed
district. On balance, the Beige Book was relatively upbeat, with all 12
districts reporting expanding (albeit modest) growth and improving conditions
in the labor market, bank lending and credit conditions, and in residential and
commercial real estate.
The
Beige Book noted that the economic uncertainty that was pervasive in the
economy in the summer and fall of 2011 continued to fade, as the word
“uncertainty” was used just nine times, down from 33 mentions in the September
2011 Beige Book as, worries over the future of Europe and a greater-than-usual
amount of discord in Washington dominated the headlines. There was just one
mention of Thailand (and none of Japan), and just 14 mentions of Europe in this
Beige Book, versus 16 in the January 2012 Beige Book. However the word
“weather” appeared 29 times in the latest Beige Book, and the phrase “warm
weather” appeared 12 times. In the January 2012 version of the Beige Book, the
word weather appeared 13 times, with the phrase “warm weather” appearing just
seven times.
It
is not unusual for a Beige Book released in March of any year to cite weather
as a factor impacting some aspect of economic activity around the nation, but
it is unusual to see warm weather mentioned so often. For example, in the Beige
Book released one year ago (in March 2011) the word weather was mentioned 36
times as the nation suffered through a very cold and snowy winter season. The
word warm appeared just twice the March 2011 Beige Book. A year earlier, in the
March 2010 edition of the Beige Book, the word weather appeared 41 times, but
the word warm appeared just twice.
Thus,
at least some of the improvement in the economic backdrop since last fall has
likely been weather-related, although it is difficult to pinpoint exactly how
much. Weather often has a bigger impact when there is a big change in pattern
from a long stretch of colder and wetter-than-usual weather to warmer and drier
weather. For the most part, since the harsh winter of 2010 – 2011 ended, 2011 was
relatively warmer and drier than usual.
Still,
the October 2011 through February 2012 period has been warmer than usual, with
January 2012 being the fourth warmest January since 1921. This period has also
been drier than usual, with the exception of November 2011. Taken together,
these trends have added to economic activity. We again turn to the Beige Book
for details.
Looking
at the detail from Beige Books during recent warmer-than-usual winters (1997 –
98, 1998 – 99, 1999 – 2000, 2005 – 2006), we find that all else equal, the warm
(and dry) temperatures will boost:
·
Overall
consumer spending as consumers spend less on heating their homes
·
Construction
activity (houses, office parks, high ways, public work projects, etc.)
·
Home
sales
·
Apartment
leasing activity
·
Mortgage
originations
·
Auto
sales
·
Non-clothing
retail sales (hardware stores, gardening centers, sporting goods)
·
Energy
and mining activity
·
Tourism
(beach and golf)
·
Agriculture
·
Restaurants
·
Overall
employment in the areas listed above, lowering initial jobless claims
·
On
the other hand, warmer-than-usual weather this time of the year can:
·
Hurt
sales of winter clothing and winter sports gear
·
Dampen
output of natural gas and oil as consumers and businesses use less heat
·
Put
a crimp in demand for hotel rooms and services around ski areas and other areas
that cater to winter recreational activities
·
Hurt
demand for feed supplies for livestock
On
the price side, warmer-than-usual weather at this time of year can also
increase the supply (and perhaps lower the cost) of fruits, vegetables, plants,
and flowers. These products are also at risk of a late frost, which could
reduce supply and cause rising prices later in the spring. Warmer weather can
mean lower feed costs for dairy, cattle, and hog producers. Inventories can be
altered as well, as too much winter clothing piles up on stores’ shelves, but
not enough lumber or building materials are produced, leaving inventories lower
than they would normally be.
Although
warm weather this time of the year does not impact every area of the economy or
even every area of the country, generally, the warmer weather can “pull
forward” some purchases (like sporting goods, gardening supplies, spring
clothing, and even autos and houses). These purchases may inflate the economic
data in January, February, and March and depress activity in the spring if the
weather returns to normal.
So
here in March, we get reports mainly for February, which should be stronger than
otherwise due to weather. Note that for retailers, March will likely be much
stronger this year versus last year due to the earlier Easter holiday (April 8
versus April 24). March data gets reported in April. But looking further out
into the year, if we have a return to “normal weather,” the data reported in
April and May for March and April could look weak and cause markets to get
concerned about another double-dip scare.
_____________________________________
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are
not intended to provide specific advice or recommendations for any individual.
To determine which investment(s) may be appropriate for you, consult your
financial advisor prior to investing. All performance reference is historical
and is no guarantee of future results. All indices are unmanaged and cannot be
invested into directly.
The economic forecasts
set forth in the presentation may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
Stock investing
involves risk including loss of principal.
International
investing involves special risks, such as currency fluctuation and political
instability, and may not be suitable for all investors.
The Beige Book is a
commonly used name for the Fed report called the Summary of Commentary on
Current Economic Conditions by Federal Reserve District. It is published just
before the FOMC meeting on interest rates and is used to inform the members on
changes in the economy since the last meeting.
The Federal Open
Market Committee (FOMC), a committee within the Federal Reserve System, is
charged under the United States law with overseeing the nation’s open market
operations (i.e., the Fed’s buying and selling of United States Treasure
securities).
This research
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