Between December 2013 and February 2014, the Manufacturing ISM Report on Business PMI (for the United States), a monthly measure of national economic growth, slid from 56.5 to 53.2, indicating a slowing of the pace of the economic expansion. This slowdown was corroborated today by Commerce Department numbers that suggest real GDP in the U.S. expanded by an anemic +0.1% rate in 1Q14, versus consensus’ expectation for a +1.2% growth rate.
Some economists have suggested that weather is to blame for the temporary impediment to growth. In my view, while the North American Cold Wave that gripped parts of the United States and Canada between December 2013 and February 2014 most certainly slowed economic output in certain industries (airline flights were cancelled, construction activity suffered, retail sales worsened), inclement weather does not entirely account for the slowdown in macro growth experienced in recent months.
Exhibit 1 below, from the Weather Channel, highlights Missouri, Iowa, Minnesota, Illinois, Wisconsin, Indiana and Michigan as states hit hardest by extreme cold this past winter. While a couple of states were forced to endure excessive heat, I do not estimate that hot weather is as economically debilitating as is the cold, so we will disregard this cohort.
Exhibit 2 likewise shows a map of the United States, but groups regions by Federal Reserve District boundaries rather than distinguishing on the basis of state borders. Observe that the states plagued by severe cold were concentrated in districts 7-9.
If cold is to blame for sagging output, then it stands to reason that the regions that suffered the most severe cold-spells should likewise have exhibited the most pronounced slowdowns. However, a perusal of this year’s Summary of Commentary on Current Economic Conditions by Federal Reserve District (A.K.A. Beige Book) reports does not support this hypothesis.
For instance, in District 7, growth increased (but remained moderate) from late-November through year-end, slowed during the January to mid-February period, and then picked back up through March; in aggregate, ‘modest growth’ over the entire horizon seems a reasonable description for Chicago-area economic activity over this timeframe. The District 8 economy exhibited moderate growth between late-2013 and mid-February and 2014, but declined slightly in late-Feb through March. Two periods of moderate improvement and one where output declined a bit seems, again, to fit with the designation of ‘modest improvement’ over the entire three or four months. Regarding District 9, the phrase “moderate growth” is consistently applied across all Beige Book reports to describe economic performance in this region since late November.
Given the assessment that activity in Districts 7, 8 and 9 improved modestly-to-moderately, the claim that weather is the culprit for the slowdown in early-year U.S. growth does not seem to hold up. The rejection of this claim finds further support from the knowing that the March ISM Manufacturing PMI also disappointed versus consensus expectations, though the overhang of uncooperative weather abated in February.
So, if weather is not the primary cause of the deceleration, then improved climate conditions obviously do not necessarily forebode a pickup just ahead. While I do think growth can stage a temporary rebound, milder weather will not deserve the accolades for any recovery that unfolds. Instead, I point to more reliable leading indicators to support the case for a rebound, such as my Composite Regional Growth Index (pictured in Exhibit 3 below). This gauge is an aggregation of five Federal Reserve Bank monthly surveys and one private survey on economic activity covering various regions across the country. As Exhibit 3 illustrates, the raw composite (the black series) moved markedly higher in April, from 56.8 to 61.6, as four of the six inputs showed noticeable improvement. The three-month moving average (the gray, dashed series), which is less noisy, also moved up from 56.3 to 57.1.
Additionally, per Exhibit 4, from Cullen Roche’s Orcam Financial, weekly rail traffic has turned up nicely in recent weeks. This is an indicator that Warren Buffet has referred to as among his favorite real-time barometers for economic growth. A simple, intuitive rationale for the relevance of this measure is that changes in the levels of raw materials, inputs and supplies being moved about the country should provide a direct read-through for the broad economy.
Also, the recent outperformance of Emerging Markets equities over global stocks implies growth should turn a corner, as empirical studies find that EM stock performance leads growth over shorter horizons.
Despite buying into the potential for imminent improvement at the macro level though, I stop short of betting that strength over the next few months will prove sustainable, as momentum for my Regional Composite Growth Index looks likely to plateau by June or July. Similarly, momentum for the ISM PMI series (Exhibit 4 below) rolled over last December and looks slated to worsen into next year.
In conclusion, it seems that for many the coincidence of timing made intemperate weather an irresistible scapegoat for the slowdown in U.S. growth evident over the last several months. However, my straightforward analysis does not support such a conclusion. As such, I think it unreasonable to expect that the abatement of extreme weather patterns will restore growth to pre-November 2013 levels; instead, I highlight alternate indicators as evidence of a coming rebound in macro activity. But, my primary timing model hints that any improvement that materializes just ahead will start to reverse before summer’s end.