The U.S. economic data has shown signs of weakening for the past three months running, despite some real optimism that developed in the fourth quarter of 2013.
That optimism was based on the end to the fiscal stalemate in Washington in October, a 4.1% GDP growth rate in the third quarter, and 3.2% growth rate in the fourth quarter (subsequently revised down to just 2.4% growth). Sky-high retail sales data that was subsequently revised sharply downward also contributed to economists’ bright mood at the end of 2013. However, poor weather seems to have interrupted the upward trajectory. The effects of abnormally cold and snowy weather seem real, but the weather is not the only cause for the recent weakness, in my opinion. Parts of the economy, including the housing sector, were already showing some slowing even before the cold weather arrived.
Putting the weather aside (poor weather will likely make the first quarter weaker than it otherwise would have been, but could potentially make the second quarter stronger), there is an ongoing debate about the underlying strength of the economy. Prior to the weather news, many economists believed the economy was set to grow 3.0%–3.5% or even more in 2014. They believed that the economy had finally reached its so-called escape velocity.
There was a second group of economists who believed that while some sectors of the economy were indeed improving, there were other sectors that were beginning to stall out. I generally subscribe to this second point of view. I also believe that over the past three years, the economy has been on a fairly steady, but slow, 2% growth trajectory. Like a slow-moving ocean liner, it has been nearly impossible for the economy to speed up, slow down, or change direction.
Similar to the prior couple of years, the economy grew modestly at 1.9% year over year. The year 2013 was characterized by a slow start, hurt by the reinstatement of the full payroll tax as well as new taxes. Growth accelerated sharply in the second half, but much of that was because of net exports and inventory building.
The good news is that inflation turned in a great performance, increasing just 1.5%, according to the CPI. Employment growth averaged 193,000 people per month, just about the same rate as in 2012. In perhaps the biggest surprise of the year, even that tepid employment growth rate was able to drop the unemployment rate from 7.9% in December 2012 to 6.7% in December 2013 as the participation rate fell, artificially bringing down the unemployment rate.
Interest rates also moved sharply higher as the Federal Reserve openly talked about potentially tapering its bond and mortgage purchases. The 10-year U.S. Treasury bond yield increased from 1.8% at the end of 2012 to 2.9% at the end of 2013.
There are many ways of looking at GDP growth, and not all of them are showing the same thing. The 2012 full fourth-quarter data compared with the 2013 full fourth quarter shows a relatively impressive 2.5% growth rate that looks like an accelerating trend. The full year-over-year data shows a less exciting 1.9% growth rate that appears to be decelerating. The sequential growth rate that is annualized, appears mostly random with huge swings that are likely to represent data measurement issues and not economic reality.
It’s highly unlikely that the underlying economy got as weak as 0.1% or as high as 4.1%. I believe the 1.9% GDP is closest to the mark in gauging the current economy, though it might be a tad pessimistic. In any case, the economy is growing below its postwar average of 3.1%, despite the fact that the U.S. economy is still recovering from one of its harshest recessions.
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