Despite widespread optimism that 2014 would bring about strong economic growth, it’s off to a terrible start. Each week, more and more data comes in that shows an economy still slowly recovering and not one kicking into second gear. Abnormally cold winter weather is undoubtedly having an impact on the economy, but it’s unclear how much of the subpar data is a result of it.
The newest evidence came from the Bureau of Economic Activity on Friday morning. The BEA revised down its initial estimate of fourth quarter GDP from a 3.2 percent annualized pace to 2.4 percent. Financial analysts were expecting a downward revision, but not one of this magnitude. Previously, retail sales and consumer confidence had unexpectedly fallen as well.
The budget deal at the beginning of 2014 that relaxed the spending cuts in the sequester brought renewed hope that fiscal policy would be less of a drag on growth. But analysts have grown more worried in recent months. Testifying before the Senate Banking Committee on Thursday, Federal Reserve Chair Janet Yellen was expected to deliver the same opening statement that she gave to the House Financial Services Committee two weeks ago. (She had been scheduled to testify before the Banking Committee the following day, but ironically, a snowstorm caused lawmakers to postpone it.) Yellen added a paragraph to her previous statement to express the Fed’s concern with the recent data.
“Since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected,” she said. “Part of that softness may reflect adverse weather conditions, but at this point it is difficult to discern how much”
The Federal Reserve has tapered its asset purchases by $10 billion in each of the past two months and members of the Federal Reserve Open Market Committee, which sets Fed policy, have indicated that the reduction is likely to continue. The Fed has been buying up billions of dollars of Treasury bonds and mortgage-backed securities (known as quantitative easing) which helps the economy go by lowering long-term interest rates. However, Yellen said that the taper is not on a “preset course,” particularly if the recent slowdown is more than just weather-related.
Huge snowstorms have brought a number of major cities to a standstill over the past two months, including New York City and Atlanta. Economic analysts believe that the weather is the main driver of the slow growth this winter and is not an indication of unexpected weakness in the economy. Josh Bivens, the Research and Policy Director at the Economic Policy Institute, says that while he often is skeptical about using the weather as an excuse for poor economic data, he’s willing to put more stock in it this year.
“I’m willing to believe that there is some weather stuff going and the monthly data is just bouncing up and down,” he said. “It’s been bad. It’s not a lot of information, but the tiny bit of information that has come in so far has not been very encouraging.”
But Bivens is also concerned with recent weakness in the housing market and the personal savings rate, which has fallen to pre-crisis levels. "Unless we start seeing some actual wage growth, it’s hard to see where lots of consumption growth goes from here," Bivens added. "[Consumption growth] seems to have been purchased so far by people just decreasing the amount of savings they’re doing." He would like to see Congress further relieve the fiscal drag and in fact use spending to add to growth, but knows that that won't happen this year.
"To me, there’s a lot more uncertainty and uncertainty is good, because at the beginning of 2013, there was no uncertainty. We were going to drag on growth hugely and have a weak year," he said. "Now, we could actually have a decent year. I would actually like to ensure that we have a decent year."
Danny Vinik is a staff writer at The New Republic.