Unless you are a participant in winter sports, you are probably glad to see winter coming to an end, even if it is taking more encores than the applause would justify. While everyone has their favorite winter misery story, the impact on the economy has been collectively greater than on any one individual. Indeed, there is a limit on the ability of “seasonally-adjusted” data to be adjusted for a winter such as this one.
Inclement weather has several repercussions. It can delay or cancel travel, postpone shopping, make meetings difficult, and increase the chance of absence due to illness. None of these factors are beneficial for the economy.
So, when such weather recedes, the pent-up demand becomes more apparent. Thus, it is expected that much of the economic activity that was delayed in the first quarter will become a factor in the second and third quarters. Look for more meetings, shopping, purchasing of big ticket items like cars and homes in the next few months.
There are also factors afoot that have nothing to do with the weather. The reduction in food stamps and other forms of assistance has left retailers like Walmart struggling, as their clientele has less money to buy things. Pressure on energy prices is in turn, pressuring the companies that help extract the same, to say nothing of the energy companies themselves. Other commodities have felt the sting of the slowdown of China, coupled with the opening of several new mines at the most inopportune time.
There are also demographic forces at work. There are now a record number of deaths, and fewer births than at any time since 1998. This trend, along with the absence of immigration, is beginning to tip the population growth of the United States to the negative. While the US has yet to experience the population shrinkage of Western Europe or Japan, the slowdown of population growth has major implications for future domestic economic growth and development.
Weather-related changes are usually more temporary than government policy changes or demography. Housing construction slows because it is hard to build a house on frozen ground. People put off buying new cars due to high heating bills, to say nothing of not being able to get to the dealers. With the coming of spring, all this should change.
So, we are looking at an economic snapback in the second quarter, as the misery of winter is replaced by the optimism of spring. This boost should last one to two quarters. After that, the world economy will either generate increasing levels of domestic demand, the minimum wage will rise, or people will return to their old habits of borrowing. As the latter two scenarios are seen as only marginally likely, we could be looking at slower economic growth by year-end, at the same time as the Federal Reserve’s bond buying program terminates, causing interest rates to rise.
How this plays out depends on several factors, all of which are beyond the control of the private economic sector. Immigration reform and a minimum wage hike are the purview of the Legislative Branch of Congress. International demand for American goods and services are a function of other countries’ own economic circumstances. Finally, America’s labor participation rate will decline, as more people retire than enter the work force. This will make labor increasingly scarce and costly. In 1950, only eight percent of the country’s population was over the age of 65. By 2035, the number will be over 20 percent.
Thus, with so much riding on international demand for domestic goods and services, it is perhaps gratifying that an investment case can be made for it. The US has the world’s lowest-cost natural gas. Natural gas is a fundamental feedstock in the production of organic chemicals, manufacturing, agriculture, transportation and the like. Domestic oil production is set to become self-sufficient by 2020, as falling demand and rising supplies finally meet. Our prowess at making things like commercial aircraft, providing financial services and access to stable capital markets, make us the envy of the world.
So, the coming spring may be longer than indicated by the calendar. Political leadership could insure that, but that is something one does not ask for, unless it is within one’s means to pay for it. Sometimes it is difficult to determine if we do well because of ourselves, or in spite of ourselves. Either way, we have a path upwards. Perhaps not the best blazed one, but still a path.
Economic data has been suppressed by the disruptive nature of the winter weather over much of the country. Over 20,000 flights alone were cancelled since last November.
Expect upside surprises from a lot of companies which are successful at capturing the business lost in the first quarter. On the other hand, some companies are dealing with problems that transcend the weather, such as impaired consumer buying power. The trick is to know the difference between the two. Many companies, suffering from the latter, will find it convenient to blame the former.
As the Federal Reserve continues to withdraw its support of interest rates by reducing its purchase program, interest rates have, ever so slightly, begun to firm up. Expect this trend to continue for the rest of the year.
By next year, a combination of the termination of the taper program with the need to raise rates to defend the dollar against increases in interest rates offered by other countries, will help to restore interest rates to more normal levels. This will cause pain for hedge funds and private equity firms that have profited from cheap money and whose interest rate is adjusted to the market. One of the few places that financial markets shoe signs of “bubble” valuations is in private equity. At this point, one cannot spin the scenario for how it will end; one knows that it will end badly.
The main driver of inflation is typically higher wages, and that is not on the horizon at this time. However, with the current drought in California, the recent drought in Texas, and record cold temperatures in the Midwest, all point to sharply higher prices for food going forward, at least until weather patterns normalize.
Most Americans spend a small part of their budget on food, typically less than 15 percent. This compares to almost twice that for the average European. Thus, while food inflation will not have a major impact, except on the poor, the psychological impact will be great, leading to demands that politicians “do something” about it. Whatever is undertaken will probably be worse than the inflation itself.
The Stock Market
Having survived the winter with little adverse effect, it is expected that stocks will benefit from the positive earnings that the next two quarters will bring.
Of interest was the sell-off last week in some of the social media stocks. It was recently observed that there is not enough internet advertising to support all the companies that are in this space. What this means is that some stocks are going to get hurt.
Warren M. Barnett March 31, 2014