Are Economic Gains Just Hot Air?

Inflation has best showing in 3 years

The Economy’s Quickening Pace

So said the headlines. Even as hopes for a Fed rate cut faded, the Goldilocks crew were able to keep hope alive. Modest growth uptick, inflationary pressures contained, why, this porridge is "just right."

Only its not.

The major data releases — the pre-revision, seasonally adjusted ones anyway — all manage to say one thing but mean another. Take the "upside surprise" of the December Retail data. Very few noted that both October and November numbers were revised downwards — and I expect December will receive similar treatment next month also. After all, we heard from the retailers themselves, who were by and large dissappointed with the holiday season. Other than sales gains caused by gasoline price increases, December was far from robust.

Next data point: Yesterday’s CPI — even though it was 0.1% worse than expected for January (+0.5% m/m, +2.5% y/y), we do not believe that number accurately reflects the prices we are paying. The
Cleveland Fed offers their own few of inflation (Median CPI). It is a measure of core inflation, based upon data released in the Bureau of Labor Statistics’ (BLS). It comports with our real world experience far better than CPI:

"According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in December…

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.7% annualized rate) in December. The CPI less food and energy rose 0.2% (2.3% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 3.7%, the CPI 2.5%, and the CPI less food and energy 2.6%."

That’s correct, it is a +3.7% year over year increase.

But the most intriguing analysis we have seen asks the following question:  Are  economic fundamentals improving, or is this simply a function of the unseasonably and record breaking warm weather we’ve been having?

"November was about 2 degrees warmer than usual, while December was 4 degrees warmer and the warmest in 50 years. Temperatures remained mild in the most of the East for the first half of January as well.

The calendar says it’s winter, but tell that to the cherry trees blooming in Washington and to the construction workers busy starting houses in New England.

The economy has certainly benefited from the warm weather. Energy prices have tumbled on reduced demand, freeing up cash for other purposes. Ground-breaking on new homes increased in November and December. Fewer workers are losing their jobs."

The upshot of the heat wave has been that the Fed appears much less likely to cut interest rates anytime soon, according to Fed Futures — certainly not in 1H ’07.

How significant has the weather been?  Merrill Lynch’s chief North American
economist, David Rosenberg, notes that in October and November, more than 80% of the economic data came in
below expectations . . . but since the first of
December, more than 50% of the data have been stronger than expected.

These weather related gains are reflect a host of non-recurring factors. As such, sone of the gains in December and January may be borrowing from March and April. MarketWatch’s Rex Nutting observes:

"Some of the boost from the weather is real, but
some of it is economic activity that’s just been borrowed from the
spring months. We probably won’t know for several months how much it is
real and how much of it is just people taking advantage of a few warm
days to do now what they planned to do in March."

Meanwhile, economists are raising their estimates in the face of stronger, albeit temporary, data. NYU’s Nouriel Roubini raised his Q4 GDP forecast from 0% to 2%; Merrill’s Rosenberg boosted his Q4 and Q1 GDP to ~3%.  And Gabriel Stein, an economist for Lombard Street Research, worries that "an economic rebound now raises the risks of a harder landing later, as the Fed overreacts to higher inflation by raising rates, ignoring the bomb shell that’s still ready to explode as weakness in the housing market saps the willingness and capacity of U.S. households to borrow."

Golidlocks tales of the end of economic risk have been greatly exaggerated.

PS: Its January 19th, and old man Winter has finally arrived in the NorthEast: Its snowing out side.  The warm weather thesis will get tested sooner than you might think . . .


Economy stronger, but is it just the weather?
Rex Nutting
MarketWatch, 4:34 PM ET Jan 18, 2007

Median CPI Up 0.3% in December
News release: January 18, 2007

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What's been said:

Discussions found on the web:
  1. theroxylandr commented on Jan 19

    The winter is finally coming, 1.5 months behind the schedule.

    I expect a sizeable jump in construction lay-offs next week (reported Feb. 1st). Tune in to new jobless claims Feb 1st 8:30am program to see.

  2. bodanker commented on Jan 19

    One thing I noticed about the “Inflation has best showing in 3 years” articles I read is that they failed to mention core inflation.

    Core inflation had its worst showing since 2001. The BLS reports core inflation as 2.6% for the year ending in December 2006, which is still at the higher end of the Fed’s comfort range.

  3. Fred commented on Jan 19

    Jan- University of Michigan Confidence…98.0…vs. street at 92.2….is this weather related as well?

  4. Steve commented on Jan 19

    It’s all weather related, Fred!

    More importantly, the weather isn’t all that good. It’s just the gubmint manipulating the weather forecasts.

  5. LAWMAN commented on Jan 19

    I had the same reaction as cygnus…we constantly slam companies for blaming poor results on the weather, but now we are going to “blame” the good results on the weather?

    Next thing I know you are going to be “blaming” good economic results on the fact that oil is cratering.

    C’mon, Barry….you are really stretching here.

  6. Barry Ritholtz commented on Jan 19

    C’mon, you guys really cannot see the difference between the two situations? I’ll explain in detail:

    In the winter, it is typically cold and snowy. When retailers complain sales are down — because its cold and snowy in the winter — we know that it is disingenuous BS.

    In the present case, temperatures are MUCH HIGHER than is expected. Record breaking warmth in December January. Demand for heating fuels/energy is lower. The ground is not frozen, so Home builders can keep working. Travel plans, shopping, etc all go on as if it were September or April — not the frigid depths of January.

    On top of that, BLS/COMMERCE then SEASONALLY adjusts all the data, to reflect the impact colder winter weather has on economic activity — even though most fo the country hasn’t had colder winter weather.

    To review: Cold Snowy weather in Winter is a bad exuse for retailers (because its SUPPOSED to be cold and snowy).

    Unusually warm weather in Winter skews the data upwards, pulling activity from the Spring to December/January — because its NOT supposed to be.

  7. wcw commented on Jan 19

    I don’t think you have to cite the weather. The data haven’t been as bad as Roubini for example had forecast, but they have not been stellar, and they have been improving somewhat (outside residential housing, that is). Some threads back I think I guesstimated a high-2s Q4 GDP, depending on deflator. I don’t think that’s unrealistic.

    I see the same worries in the economy that you do, but this fall’s data has been consistent with the soft landing so far.

    Chicago Fed’s national activity index for December comes out Monday. My bet is that it remains slightly negative, but improved over the previous month, congruent with a view that things are not all that rosy, but not all that bad and improving for now.

  8. Steve commented on Jan 19

    I think the problem is that certain people are trying ascribe far too much of the economic activity that we see today to the good weather. Certainly it’s plausible that better than expected weather might help, but the reality is that the economy is in much better shape than many thought it was going to be. You’ve got someone like Roubini who is trying to explain away his 0% Q4 prediction solely on the basis of better weather, which is simply ridiculous.

  9. Fred commented on Jan 19

    ‘To review: Cold Snowy weather in Winter is a bad exuse for retailers (because its SUPPOSED to be cold and snowy). ‘

    Don’t you mean warm weather is a bad excuse?

    IMHO, if you won’t use weather in retail, you shouldn’t use it in Econ.

    BTW…if the retailers are so disingenuous, why are they leading the market currently??

  10. CornerKick commented on Jan 19

    “To review: Cold Snowy weather in Winter is a bad exuse for retailers (because its SUPPOSED to be cold and snowy).”

    Actually. Barry, if you wanted to be consistent, you would point out that while good for construction, unseasonably warm temps are actually BAD for much of retail, particularly clothing.

    For goods such as clothing that are purchased 6 months in advance, this weather hurts since those heavy winter coats and the like will sit there until they are discounted 80% in a few weeks.

    If you want to start “counting” the warm weather, wouldn’t this mean that the better than expected retail numbers show even more consumer strength than it would appear at first glance?

    When even Roubini admits that the economy is stronger than expected, maybe it is time to admit that the economy is stronger than you expected.

  11. RMX commented on Jan 19

    “BTW…if the retailers are so disingenuous, why are they leading the market currently??”

    Because the “rotate into tech” plan got smacked in the mouth by SAP, DOX, SYMC, INTC, AAPL, IBM etc.. So Retail (and maybe Health Care?) is about the only trick left. And if oil turns up again, the fast money may bail out of retail too.

  12. Fred commented on Jan 19

    ” “rotate into tech” plan got smacked in the mouth”

    Well see. Dissing tech (despite generally good earnings) seems to be a crowded opinion…led by the Booyah himself. I’ll take the other side of that crowd anyday…and it’s NOT a trade.

    …IBM creeps higher….

  13. BDG123 commented on Jan 19

    The drop in energy is helping the economy. I’m not sure retail sales are really grand given many merchants are seeing their stocks down significantly and an anecdotal look at store merchandise amongst apparel retailers looks to point to a weak Xmas to me. UK reported strong retail sales as well. Why wouldn’t retail sales be reasonably decent if unemployment is low and consumer confidence is high? Consumers aren’t going to quit spending until layoffs pick up. The consumer is always the last to know something……….And the economy doesn’t necessarily need to fall off of a cliff for the stock market to crater. Does anyone ever learn anything? Six years ago the stock market fell off of a cliff and we had the shortest recession in modern times. Was that a one time occurence in people’s minds? If it is, they better re-adjust.

    Using consumer confidence as a proxy is just about ridiculous since the last time it was this high, the markets tanked for eight months.

  14. Mike M commented on Jan 19

    Isn’t it nice that we are debating the weather’s affect on the economy? We can debate our retail/consumption economy endlessly, it seems. Spending is good, saving is bad. I wonder what will happen to the stock market if people actually start saving money again? or reducing debt? No sense discussing this. The weather was good, so more people spent money they don’t have. Stocks go higher.

  15. Barry Ritholtz commented on Jan 19

    I’m amazed that some people do not see any shades of gray.

    I see a huge difference between viewing what is considered typical and ordinary and expected (i.e, Wintwer weather) as a poor excuse for economic activity.

    Now compare that with something that’s extraordinary — record-setting, even — in how unusual it is — and its impact on economic activity.

    Is that somehow too subtle?

  16. Fred commented on Jan 19

    My understanding was that retail was crying because weather was too warm…not “wintery”. Color me confused.

  17. B. Sneath commented on Jan 19

    We humans can be quite predictable. Once we emotionally commit to a certain belief, we tend to filter new information in a fashion to support our belief, BR has eluded to this phenomenum himself in past blogs, and while I believe he is one of the more objective economists, I sense he may be falling victim as well.

    Yes, we are seeing the housing bubble collapse, lower housing prices, higher foreclosures and late payments, lower mortgage equity withdrawls, fewer construction and housing related mfg jobs, higher new start cancellation rates, subprime lenders going under, etc. Yes, based on past trends, housing will not fully recover for quite some time, and yes, housing will have ripple effects throughout the economy.

    However, while housing and MEW are big horses, they are not the only horses in the race and a number of the other horses are running fast.

    Good employment numbers
    Rising Incomes
    Excellent YOY exports
    Good YOY mortgage application numbers including continued high refinancing levels
    Significant drop-off in commodity prices with positive inflation, housing and construction affordability, disposable income and net corporate profit implications
    Last year’s higher stock prices and related wealth effects supporting consumption
    Unprecedented widespread global economic expansion(even in Europe) thus improving export growth, jobs and corporate profits
    A gradual realignment in currencies, with the $ falling, the Euro and Yuan rising thereby increasing exports and import substitution.
    A strong farming sector with global demands for food and biofuel.
    Very low long-term interest rates that encourage both corporate and government (municipal bond) capital investments
    Strong growth in Federal, State and Local tax receipts encouraging higher Gov’t outlays
    Unrelenting expansion in the health care services sector
    Retail sales higher in December
    Initial Claims falling
    Some rebound in building permits and housing starts
    Increase in consumer confidence, including future expectations

    All of us are trying to understand how this horse race will play out. It will be easier to tell if we remove our dark-shades or rose-colored glasses, which ever the case may be.

  18. Sam Park commented on Jan 19

    Anyone catch how NAR is spending $40 million on an ad campaign that will run throughout this year. It targeting both home sellers and buyers. It’s like if you can’t call the housing market properly, might as well try to manipulate it.

  19. alexd commented on Jan 19

    Okay, if the extremly mild winter has a negative effect on clothing retailers due to excess winter inventory then there is a trade.

    Short the retailers, then when you cover buy them in order to take advantage of warmer weather, for the summer cycle.

    If any one here thinks the weather doesn’t count take a commodity trader, one who trades perishables, out to lunch. Betcha someone lost a fortune on oj and someone else made one, due to the frost in CA.

    Also anyone else noticing that the action is picking up in pharma and in parts of biotech? Look at the so called defensive plays of food and tobacco. Yeah I know big tobacco is gonna get their butts handed to them for gaming nicotine, but that also tells me how hard it is for them to loose their customer base.

    Also the movie “Thank you for Smoking” is funny.

    Stop complaining. With all the new ETFs we can invest in areas and ways that were much tougher 10/20 years before.

    Ladies and Gentlemen place your bets, there’s something for almost everyone.

    Okay there is no etf yet to bet on a lack of volatility aside from Bonds, but if we give the industry 20 minutes they will announce one.

  20. ac commented on Jan 19

    I see growth last quarter slightly less than the quarter before. The slowdown as this stage is slow but steady, something that is rare, but understandable when you have two competing forces against each other.

    Fred, consumer confidence isn’t a very good read, especially since it doesn’t “really” drop to recession.

  21. donna commented on Jan 19

    I think we’re starting into a stall. The trick is going to be to keep us from going into a dive.

    California just lost up to 70% of many crops. Food is going to get more expensive. If many more places get hit with this severe weather, who knows. What happens if we get more record snows in the Northwest, if those storms start dumping on the northeast, if the midwest keeps being covered in ice storms?

    Yeah, the weather is going to be a factor, most definitely. Especially if the intensity of the storms keeps increasing. We didn’t get the hurricanes this year, but the typhoons in Asia were very impressive and had huge effect on rice and other crops there. We could be in for a really bad year.

    It’s El Nino year, which means our California weather is about to turn pretty nasty. We’ll see if the mud slides kick in this year. Could get rough on the housing market if we have many more homes sliding down hillsides.

  22. JoeyB commented on Jan 20

    Well houses sliding into the abyss sure will help the inventory hangover!

  23. New York Real Estate commented on Feb 22

    Thank you for smoking was a good movie. But I do tend to agree, so much is spent over saying how the economy is this or that, rather than actually doing something about it.
    New York Real Estate

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