At first glance, weak retail sales and sluggish job creation suggest that the US economy has slowed over the past two months. However, unusually cold weather and snowstorms have been major contributing factors to the slowdown. As a result, don’t expect the Fed to panic just yet.
Retail sales in the United States fell by 0.4 per cent in January – much weaker than market estimates – to be 2.6 per cent higher over the year. It represents a significant slowdown over the second half of 2013.
Although the weakness can partly be explained by weather, the data is still undeniably soft, particularly since markets knew about the adverse weather conditions and yet still expected growth of 0.3 per cent in January. Unfortunately, the market didn’t miss because of some unforeseen factor.
Much of the weakness was due to poor motor vehicle sales, with retail spending on motor vehicles and parts declining by 2.1 per cent in January, following a fall of 1.8 per cent in December. Excluding motor vehicles, retail sales were unchanged in January but revised down significantly in December.
A further contributing factor may have been the failure of Congress to extend unemployment insurance for around 1.3 million people. Legislation allowing unemployment insurance to be extended for a period of 99 weeks expired at the end of December, and while Congress has negotiated bills to extend the benefits, nothing has been passed yet.
Based on the revisions to retail spending in December, US GDP is set to be revised down for the December quarter when the next round of estimates comes out at the end of February. In the initial estimates, real consumption rose by 0.8 per cent but that is unlikely to hold in light of the revised retail sales data.
Soft retail growth combined with sluggish job creation will be a concern for the Federal Reserve and the broader US economy. Consumption is a major driving factor for the economy and it’s where you would expect to see improving labour market conditions take hold. Indeed we had been seeing exactly that until sales and employment growth slowed significantly in December.
For now the Fed is likely to consider extreme weather – and even the failure to extend unemployment benefits – as temporary factors that will slow growth in the near term but have no discernible impact on the medium-term outlook.
The first factor at least will eventually sort itself out; unemployment benefits, on the other hand, will involve more posturing and political theatrics but I am becoming confident they will eventually be extended. Hopefully political ideology won’t get in the way of a tentative recovery that was finally showing signs of momentum late last year.
As a result, the Fed is unlikely to panic just yet and new chair Janet Yellen made it clear just two days ago that the central bank would prefer to continue reducing its asset purchases when it next meets.
But as it has said countless times, the Fed is data dependent and will also want to see a strong rebound following these temporary factors before committing to further tapering. Continuing weak retail spending and job creation in February might just be enough to stall the Fed when it meets in March but for now it remains likely that it will cut asset purchases further.