- The Fed mentioned "weather" 119 times in the March Beige Book. It is going all in on winter weather being the cause for the weak economy.
- Our analysis suggests cyclical trends are the root cause.
- Monetary policy is tightening at the exact wrong time.
Time and time again, we hear that the recent economic slowdown is the result of extreme winter weather. It would appear that the Fed is going full tilt with that assessment as well for the economy.
In the March 2014 Beige Book, the word "weather" was mentioned a whopping 119 times when explaining current economic conditions. That is nearly 12 standard deviations above the mean from any given month, and about 10.5 standard deviations above the mean for any given winter month.
The Beige Book is basically placing the entire blame for the weak economy on weather conditions. Conversely, the Fed is stating that once temperatures return to normal, the economy will - not should or is likely to - accelerate back to the speed it was showing in the second half of 2013.
Essentially, the Beige Book tells us that the Fed does not believe the current economic malaise could be a cyclical tend.
This thought process is very dangerous for the economy, especially knowing that the Fed is actively looking for reasons to continue to taper.
At the end of last year, economic forecasters were predicting strong and above-potential growth for 2014. Strong upside surprises occurring regularly in the economic data throughout the second half of 2013 buoyed that thought.
As we expected, the winds shifted and the economic data weakened abruptly.
Within two weeks, the economy went from growing at two standard deviations above its long-term trend to meeting trend. The quick shift in economic growth coincided with one of the worst winter weather conditions on record. It was easy for economists - and the Fed - to blame the downturn on temporary weather effects.
Yet, looking over the last few years, the economy has tended to accelerate into the new year, only to fall back to more "New Normal-ish" growth patterns. There is nothing special or concerning about the current pullback in economic growth.
Furthermore, almost all of the data releases from the month of January provided evidence of cyclical problem and not a temporary weather-induced exogenous shock.
An employment report that detailed gains in the construction sector -- which should have been the hardest hit from poor weather.
Housing starts fell 12.5% in the South, but increased 61.9% in the Northeast. Weather problems should have reversed those results. Overall, the 880,000 gain was almost exactly the average of the number of starts from April 2013-October 2013. That suggests that starts returned to a historical trend, as opposed to a downward shock from a weather-like event.
Manufacturing production fell 0.8% in January, but revisions going back to October were all revised down. The motor vehicle industry was hit especially hard, but the decline in assemblies came at a time when dealer inventory levels are peaking. Regardless of the weather, motor vehicle manufacturers could not keep up production with current inventory levels.
Existing home sales fell 5.1%, in part due to a 7.3% decline in demand from the West, an area that was not impacted by the polar vortex.
Total construction spending increased 0.1% in January, even after a large upward revision to December construction gains. Spending on private residential structures - which take place entirely outside - increased 2.1% in January, after increasing 2.8% in December. Weather-related problems should have caused a big decline in this type of spending.
New home sales jumped 9.6% in January. With the exception of the Midwest, where sales fell a plausible weather-related 17.2%, sales were strong throughout the country. That included a 72.7% increase in sales in the Northeast, which more than recovered after a downward shock in December, even though adverse weather conditions affected most of that area.
Overall, the weather factor seems way overblown.
If the economy is slowing down due to cyclical effects and not weather effects, like it has over the past few years, then the Fed is tightening policy right into a cyclical downturn. Instead of helping the economy, the Fed could be its largest headwind in 2014.