Fed Saw Growth Even as Harsh Weather Slowed Hiring, Sales
The Federal Reserve said the economy in most regions grew last month even as harsh winter weather impeded hiring, disrupted supply chains and kept customers away from stores and auto dealerships.
Eight of the Fed’s 12 districts “reported improved levels of activity, but in most cases the increases were characterized as modest to moderate,” the Fed said today in its Beige Book business survey. The New York and Philadelphia districts reported declines that were “mostly attributed to the unusually severe weather experienced in those regions.”
Fed Chair Janet Yellen and her policy-making colleagues are trying to determine whether recent economic weakness stems from harsh winter weather or fundamental obstacles to growth. The Beige Book will be among reports reviewed by the Federal Open Market Committee on March 18-19 during its first meeting led by Yellen since she succeeded Ben S. Bernanke last month.
The Beige Book report from all 12 Fed district banks may help policy makers decide whether to proceed this month with another $10 billion cut to bond purchases by the Fed, reducing the monthly pace of buying to $55 billion. Three rounds of so-called quantitative easing have pushed up the central bank’s balance sheet to a record $4.16 trillion.
“This has some value precisely because it provides more anecdotal evidence, a more concrete rationale, in support of the slowdown being weather-induced,” said Eric Green, a former New York Fed economist who is now the global head of rates, FX and commodity research at TD Securities in New York. As winter ends, “you would be expecting to see growth bounce higher and I think job growth could also bounce higher.”
Today’s Beige Book, based on data collected before Feb. 24 and compiled by the Atlanta Fed, said “the outlook among most districts remained optimistic.”
Much of the economic weakness was attributed to weather, according to the Beige Book. Retail sales “weakened” for most parts of the country “as severe winter weather limited activity,” and “weather was also cited as a contributing factor to softer auto sales in many districts.”
Snow and frigid temperatures also “disrupted supply chains and delayed shipments” in several Fed districts and had “a negative effect on sales and production” at manufacturers. Contacts in most Fed districts were “optimistic about the future and expect manufacturing activity to rise in the coming months.”
On the plus side, the harsh winter “benefited many ski resorts,” and most districts had “an optimistic outlook” for hotel bookings for the rest of the year.
The Labor Department reported weaker-than-expected payroll growth in December and January and will probably report on March 7 that the economy added 150,000 jobs last month, according to the median estimate in a Bloomberg survey of economists. A private report on payrolls showed today that companies in February added fewer workers than projected.
“Unseasonably cold weather has played some role,” Yellen said in reply to a question during Feb. 27 testimony to a Senate committee. “What we need to do, and will be doing in the weeks ahead, is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”
Boston Fed President Eric Rosengren said last week that “if we find out the economy is slow, not because of weather but because of underlying fundamentals,” then “we could certainly pause in terms of the tapering program.”
Yellen said today the Fed is falling short of its congressionally-mandated goals to ensure maximum employment and stable prices. It’s “clear that the economy continues to operate considerably short of these objectives,” she said during her ceremonial swearing-in in Washington.
Service industries expanded in February at the slowest pace in four years. The Institute for Supply Management’s non-manufacturing index fell to 51.6 last month, lower than any forecast of economists surveyed by Bloomberg and the weakest since February 2010, from January’s 54, the Tempe, Arizona-based group said today. A gauge above 50 shows expansion. The median estimate in a Bloomberg survey of economists was 53.5.
A 139,000 increase in private employment last month followed a revised 127,000 gain in January that was weaker than initially reported, the weakest two months since August-September 2012, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of 39 economists surveyed by Bloomberg called for a 155,000 advance.
Sales at U.S. retailers fell in January by the most since June 2012 and housing starts slumped by the most in almost three years, according to Commerce Department reports.
Severe weather and reductions in Fed stimulus haven’t derailed the stock market. The Standard & Poor’s 500 Index climbed to a record 1,873.91 yesterday. The index has increased 3.5 percent since Dec. 18, when the Fed announced the first tapering to the pace of bond purchases.
The S&P 500 rose 0.1 percent to 1,872.14 in New York at 3:19 p.m., while the yield on the 10-year Treasury note fell one basis point, or 0.01 percentage point, to 2.69 percent.
Businesses predicting a rebound once the weather improves include Target Corp., which said sales have shown signs of gaining in February, and Macy’s Inc., which anticipated that spring will bring a sales recovery after frigid weather forced hundreds of store closings.
“Once warm spring weather arrives and our full assortment of fresh spring merchandise is in place, we believe customers will return to a more normalized pattern of shopping,” Terry Lundgren, the chief executive officer of Macy’s, the second-largest U.S. department store company, said in a Feb. 25 statement.
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