Consumer spending in the United States lessened because of cold, snow and storms during the winter months according to the Federal Reserve’s ‘beige book’ report. But was the cold weather the only factor to blame for the weak economic data?
As parts of America are experiencing their worst winter in 30 years, the severe weather has taken its toll on the US’s economic recovery, the Federal Reserve said Wednesday.
While cold weather and snow gripped much of the country in January and February, consumer spending was hit across the US, according to the Fed’s latest “beige book” report on the state of the economy; manufacturing and construction were also adversely affected. Weather was also cited as a contributing factor to softer auto sales in many areas. While the unseasonable cold did the most damage in agriculture, California’s record drought has also taken its toll on the state’s economy.
The Fed said hiring had notably softened in regions of the country hit by the severe cold. But the rate at which temporary hires were being converted into permanent hires picked up, and the underlying recovery appeared to be continuing. “Many districts continued to note shortages for particular types of specialized, technical skilled labor, such as healthcare professionals and information technology workers. Atlanta and Dallas also noted shortages for freight truck drivers,” said the Fed.
In total, the report mentions “weather” 119 times and “winter” 54 times, calling it extreme, harsh and severe. “Severe” appears 35 times in the report, “cold’ 31 times, “snow” 24 times, and “storm” 15 times.
The report comes before Friday’s monthly snapshot of the US jobs market. The non-farm payroll report, one of the most influential in the economic calendar, will be especially closely watched this month as it follows two disappointing reports. The US added an average of 205,000 per month in the year to November 2013, but December’s reading was only 75,000 and January’s 113,000. Economists polled by Thomson Reuters are expecting the US to have added 150,000 new jobs in February.
The severe winter has especially affected air travel. From December 1 through February 28, 108,600 flights were canceled, almost double the average of previous winters of 57,600, according to a poll by data tracker MasFlight.
Fed chair Janet Yellen told Congress last week that it was too soon to calculate the long-term impact of the extreme weather on the US economy.
The Fed is currently paring back its massive bond-buying economic stimulus program, known as quantitative easing (QE). Currently the Fed is pumping $65bn a month into the economy via QE, but is expected to cut that by $10bn at its next meeting unless the weather proves to have had a serious impact on the recovery.
“That recent weather impacted activity across the country should be no surprise. Numerous reports have suggested weather disrupted housing and manufacturing among other things,” Dan Greenhaus, chief strategist at broker BTIG said in a note to clients. “Simply put, the Fed’s beige book indicates that weather affected nearly the entire economy across the country this winter.”
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Why Australia should fear a US government default
By: All Things Forex
Published October 7, 2013, in Forex Outlook
In May, the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures run out on 17 October. If the USS America goes down, little HMAS Australia will find it tough not to get sucked into the vortex…
The current US government shutdown has little impact on Australia, but if the US hits the debt ceiling Australia will feel the consequences of a bitterly partisan US political system.
One of the more ironic aspects of the US government shutdown is that if it goes on for much longer, the government won’t be able to calculate its economic impact because it won’t be able to collect the data.
Last Friday was supposed to be the most recent release of US jobs figures, and yet those logging on to the BLS website would have seen this:
During the shutdown the BLS won’t be able to collect the data to calculate the employment figures. Similarly the Bureau of Economic Analysis is also shut down, which rather makes collating data for the GDP figures a tad tricky.
But for Australians the big issue is not so much the shutdown. Costly as it is to the American economy – wiping about 0.1% of GDP growth each week – it does not have a great direct impact outside its borders. After all there are not many Australians employed by the US government or about to go to a US national park this weekend. The real bitter pill for the rest of the world (and US) comes in a couple weeks when the US reaches its debt ceiling.
The debt ceiling is often lazily referred to as the US government’s credit card limit, but it is not about giving the US government the right to spend more, but the ability to borrow to pay off spending it has already undertaken.
The debt ceiling is currently at $US16.699tn, and was actually reached in May but the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures will run out on 17 October.
At that point the US will no longer be able to borrow money to pay its bills. In the short run that is OK, because the US government gets enough cash from tax revenue to cover its expenses. But on 1 November it gets a bill for US$67bn for social security, medicare and veterans benefits. By 15 November the US government will be short about US$108bn. And that means defaulting on its payments.
No one really knows what will happen if the debt ceiling is not raised. Views range from, it’ll be fine, to it’ll be Armageddon. The US Treasury for its part has put out a paper that paints a pretty scary picture.
After looking at what has occurred in 2011 when the US nearly reached the debt limit, it concluded that a debt default “could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth”.
It also noted that “many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression”.
And just in case you are a glass-half-full kind of person and you still have some optimism, the report ends on this less than upbeat note: “Considering the experience of countries around that world that have defaulted on their debt… [the] consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”
Cheery.
Thus far the markets have been rather sanguine. The US Treasury 10-year bond yields are lower now than they were a month ago – suggesting investors are not too spooked about the long-term US economy. There is also a sense that investors are a bit jaded – the debt ceiling fight is now becoming an annual event.
But in the past few days, investors have become very worried about holding US treasury bonds which mature in the next month.
The spread of the six-month to one-month treasury bonds fell off a cliff, to the point where investors are now demanding a higher return for buying a one-month US treasury bond than for a six-month.
Should the default actually occur you could expect those jaded investors would suddenly get very alert. A US government default would put the world economy into uncharted waters. Around 87 % of all foreign exchange transactions involve US dollars. If the US government can no longer guarantee it will pay its bills (even for a short time), that rather upsets the integrity of the entire system.
In 2011 when the debt ceiling was almost breached, the US’s credit rating was downgraded to AA. It hurt US confidence, put a big hand brake on economic growth, and the turmoil on financial markets reduced American household wealth by around US$2.4tn.
For Australia, in 2011 our dollar at the time soared to US$1.10 as the American currency lost value. With the value of our dollar already rising the last thing our manufacturing sector needs is for the dollar to be given a boost.
For the moment most expect congress to back down and raise the debt ceiling (or perhaps even suspend it for a few more months like they did last year).
But Australians should hope that the US gets its act in order soon. While it is nice to think that we are now bound to China, a look over the past 20 years shows that aside from extraordinary circumstances – such as the dotcom bubble and September 11 attack, and our mining boom in 2006 – Australia and the US’s GDP growth is quite closely linked.
Our economy is like a dinghy in the ocean of the international economy. If the US scuttles itself though political intransigence, without another mining boom, little HMAS Australia would find it tough not to get sucked into the vortex as USS America goes down.
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