David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.
The economic news has been pretty darn good of late. Employment is up and consensus estimates are looking for about 200,000 new jobs to be reported for February this Friday on top of the 241,000 jobs created in January. The unemployment rate is coming down, consumer confidence is up, and automobile sales were at a 15 million run rate in February, the highest in five years. What's not to like?
Make no mistake, the economy is getting better, but we shouldn't be misled by the seasonally adjusted data the government reports. Why? Normally economic activity is constrained in the winter months by cold weather, which limits outdoor work and at times prevent people from getting to work—think construction and office closings. The government's statisticians adjust the data to reflect this very real phenomenon.
However, the National Oceanics and Atmospheric Administration just reported that we experienced the fourth warmest winter in history. Compared to last year, this winter has been absolutely balmy with the national average temperatures six degrees and five degrees warmer than last January and February, respectively. All of a sudden the seasonal adjustment factors which are looking for winter weakness don't work the way they are supposed to as the unusually warm weather makes it look like the economy is going into over-drive.
In terms of the automobile sales, just think of what winter is normally like. Most folks in the Midwest and Northeast have to brave sub-freezing weather and snow just to get out of the house, much less go to an automobile dealer. On top of that who really wants to treat a new car with a strong dose of rock salt on its undercarriage? But with mild weather, it is far easier to think about buying a new car in February rather than wait until April. Thus I suspect the automobile sales data represent a shift in demand rather than new demand for motor vehicles.
Similarly the warmer weather made it easier for people to get out of their house to go shopping and to eat out at restaurants. It is no surprise that most retailers reported stellar sales in February. Some observers thought that retail sales would have been crimped by soaring gasoline prices. To be sure high gasoline prices have been a negative, but this factor has been offset by plummeting natural gas prices and reduced volumes of both natural gas and home heating oil. For many consumers in the Northeast, natural gas heating bills are down 20-40 percent this year, and that goes a long way to pay for higher gasoline prices at the pump.
As a result I suspect we will get a somewhat more sober picture of the economy with the March and April data. My guess is that we will get some "payback" in the form of a slower growing labor market and somewhat weaker consumption. The consumer side of the economy will still be growing, but it won't look as strong as it does now. Indeed, by May, with home heating costs no longer offsetting higher gasoline prices, we might once again hear talk of another slowdown.