Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.

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Implications of an even weaker Q1
(March 29, 2014)

The Bureau of Economic Analysis (BEA) reported this morning that real gross domestic product (GDP) was even weaker in the first quarter than initially estimated. In the February issue of the Quarterly, first-quarter real GDP was expected to increase 1.4 percent at an annual rate. Instead, the BEA estimated that first-quarter real GDP was up a mere 0.1 percent. Now, even that estimate was too high, given that the BEA's revised estimate was that real GDP fell 1.0 percent in the first quarter. Apparently, the unusually harsh winter had an even more adverse effect on the pace of economic activity than I expected in February or estimated by the BEA initially.

The evidence that it was the weather is in the details of the report. In particular, every major component of GDP detracted from growth in the first quarter except for consumer spending. Private domestic fixed investment detracted 0.4 percentage point, with both residential investment and nonresidential investment detracted 0.2 percentage point. This very likely was due to weather. Net exports detracted nearly 1.0 percentage point, as exports plunged and imports were flat, which also could be due primarily to the weather. Government spending detracted nearly 0.2 percentage point, led by a solid drop in state and local spending--also weather related. Finally, the change in private inventories subtracted 1.6 percentage points from real GDP growth in the first quarter. In total, these components subtracted roughly 3.1 percentage points from GDP growth, more than offsetting the 2.1 percentage points contribution from consumer spending.

And even the contribution to growth coming from the 3.1 percent jump in real consumer spending in the first quarter was probably weather related. After all, the bulk of the gain in consumer spending was on services, which surged 4.3 percent. This was the strongest quarterly gain in consumer services spending during the nearly five years of the current expansion, reflecting large gains in housing and utilities and health care. Clearly, the utility usage was up dramatically even on a seasonally adjusted basis in January and February. However, the increased spending on health care may have been driven more by the introduction of new government sponsored health plan than the weather.

Nevertheless, the weather had a huge impact on the U.S. economy in the first quarter. If this was the case, then a return to more normal weather most likely would trigger a sharp recovery. Based on more recent data, this seems to be the case. At the moment, most models that are used to track real GDP in the current quarter show that it is on track to climb at nearly a 4.0 percent pace. Although this would still leave the growth rate for the first half below the historical average for this stage of an expansion, it still may prove to be fast enough to push the unemployment rate lower and to create some inflation risk later in the year.

Some claim that the Treasury bond market suggests that the economic rebound will fall short of expectations, while the stock market seems to be a bit more constructive on the outlook. I contend that the stock market is currently being driven by the economic fundamentals, while the bond market is being dominated by technical factors--less supply owing to improving federal budget deficits in conjunction with the gradualism of the Fed's tapering of its quantitative easing policy. Of course, geopolitical risk also makes U.S. Treasury obligations the safe haven for global investors. If the bond market was nervous about the economy, then credit spreads would be widening. They remain extremely narrow.

This will be discussed in more detail in the next Quarterly, which I am currently preparing. It should be available in the next week or so.
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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


2014 Commentary

Implications of an even weaker First Quarter
(current article)
-- March 29, 2014

Invasion!
-- March 3, 2014

2013 Commentary

Furloughed!
-- October 25, 2013

Doomsday forecasts: Honest people can disagree
-- April 26, 2013

Making sense of the February jobs report
-- March 10, 2013

Growth gyrations continue
(current article)
-- January 28, 2013

2012 Commentary

Optimism, not irrational exuberance
-- October 15, 2012

Disappointing but far from disastrous
-- July 31, 2012

Assessing the recent weak economic data
-- June 8, 2012

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

Surprise!
-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

2010 Commentary

What's going on?
-- October 15, 2010

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