The U.S. economy has stalled amid a winter freeze but the Federal Reserve is unlikely to act because warmer weather should bring a rebound, leading to higher U.S. stock prices and tighter credit spreads.
Last week we correctly forecast that U.S. retail sales would be heavily hit by the cold snap. Since then, there has been a litany of weather-related bad news -- U.S. industrial production has decreased, mortgage applications have fallen, housing data disappointed, and even restaurants are struggling. The full extent of the weakness may have surprised many, but investors often underestimate the ripple effects of a supply chain interruption. This environment is evocative of Japan’s 2011 earthquake and tsunami, which threw the global supply chain into such disarray that it caused an 11 percent decline in U.S. auto sales in the middle of that year.
Economic weakness may lead some investors to think the Federal Reserve might act, but policymakers are unlikely to alter their current tapering course based on short-term economic swings. Nevertheless, in the coming weeks, market jitters could push 10-year U.S. Treasury yields lower as it becomes apparent just how badly the economy has stalled.
The good news is that this is likely only transient noise, and that rising temperatures in March and April should revive everything from auto sales to factory activity, helping the U.S. economy return to its improving trend. Pent-up consumer demand should re-accelerate growth in the spring after this short, sharp pain, setting the United States on course for solid growth in 2014 of 3.5 percent or more.
Given underlying economic strength, the recent upside breakout of the New York Stock Exchange’s Advance/Decline Line adds to expectations that U.S. equity prices will continue rising over the next three to six months and that U.S. bond spreads should tighten further.
U.S. Rebound Likely After Weather-Depressed January
Economic data for January continues showing the negative effect of unusually cold weather in much of the United States. However, the weak data is likely temporary, and should reverse once weather returns to more normal patterns. Based on past experiences where cold weather depressed retail sales in January, there could be a meaningful rebound in consumer activity in the coming months as pent-up demand is released.
RETAIL SALES, LEVEL IN DECEMBER=100
Source: Haver, Guggenheim Investments. Data as of 1/31/2014. *Note: Severe winters have Januaries in which the deviation of heating degree days (a measure of temperature) plus the deviation of precipitation is greater than 10 percent and retail sales are negative – something that has occurred five times since 1978.
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