Did the Weather Rain on US Economic Growth?
Federal Reserve’s March 2015 Meeting Minutes Show a House Divided (Part 3 of 4)
Economic growth to moderate
The FOMC’s (Federal Open Market Committee) minutes from the March 17-18 meeting showed that policymakers agreed on moderation in economic activity early in 2015. The Fed staff, which also releases its economic outlook, revised its projection on economic growth for the first half of 2015 down from that in January.
Economic growth has been revised down for 4Q14 as well. The third estimate by the Bureau of Economic Analysis (or BEA), released on March 27, showed that US Gross Domestic Product (or GDP) grew at a 2.2% pace in the 4Q14 over the corresponding period a year ago. The advance estimate, released in January, had placed the pace of US economic growth at 2.6% for this period.
Why are policymakers and the Fed staff estimating economic growth to have slowed down in 2015?
Weather forces consumers indoors
Weather could have been a major reason for the downward revision. Since consumers were forced indoors, consumer spending slowed down. As per the latest reading, consumer spending rose by 0.1% in February, after having fallen by a downwardly revised 0.2% pace in January. Since household spending forms ~70% of economic output, meager growth in this measure impacts overall economic output immensely.
Footfalls in department stores fell, impacting their sales. However, utility companies like NextEra Energy (NEE), Dominion Resources (D), and Southern Company (SO) benefitted due to high energy demands in the cold weather.
Consumer spending was supposed to quicken due to the windfall consumers had received from lower gasoline prices. Prices at the pump, though, have rebounded a little from their January lows, but they are still lower than they were in 2014. ETFs like the United States Oil ETF (USO) are still feeling the impact of low crude oil prices. Prices are down 51% from a year ago. However, consumers’ wallets have benefitted due to the resulting lower gas prices.
Is it the weather, or have wary consumers decided to lower their debt burden and shore up their finances with this windfall? Only time will tell. But ETFs that are sensitive to consumer spending, like the Consumer Staples Select Sector SPDR Fund (XLP) and the Consumer Discretionary Select Sector SPDR Fund (XLY) will hope for the best.
In addition to consumer spending, there are other factors impacting economic growth. Let’s look at those in the next article.
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