Early Spring Boosts Economy, but Benefit May Not Last

The weather has giveth, and the weather is likely to taketh away, once the benefits of an early spring wear off certain sectors of the economy.

An ice cream vendor pushes her cart near the U.S. Capitol on the National Mall in Washington, DC.
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An ice cream vendor pushes her cart near the U.S. Capitol on the National Mall in Washington, DC.

Record warmth has swept over much of the nation — in particular the Northeast — driving consumers to spend more and builders to contemplate getting their toolbelts out again in search of prospective new homebuyers.

But some economists are warning that the pulled-forward demand — that which normally happens later in a cycle but is accelerated by unusual circumstances — will wear off and the U.S. economysoon will find itself back in a chilly slow-growth mode.

Speaking for the camp that believes "sluggish" growth is likely ahead, Goldman Sachs economists say the warm weather indeed has caused upticks in areas that normally would be marked up anyway because of seasonal adjustments.

Specifically, Goldman says that its proprietary economic measure, the current activity indicator (CAI), has seen a 0.3 percentage point increase due to the weather.

"Our bottom line is that there are several reasons to believe that the recent data may have overstated the strength of the US economic data," said Jan Hatzius, Goldman's chief economist. "All told, we believe that the numbers are likely to slow to a pace that looks much more consistent with a 2 percent rather than a 3 percent or even 3.5 percent growth pace through the end of the second quarter."

Indeed, despite the recent uptick in some data points, particularly in employment, Goldman is not budging from its forecast that growth in gross domestic product will be stuck at 2 percent for the first three quarters of 2012, and will accelerate to just 2.5 percent in the fourth quarter.

"How plausible is this? We still think it is quite plausible because we believe that a significant part of the recent strength in the CAI is likely to be temporary," Hatzius said.

Among five reasons besides the weather that Hatzius cites for his forecast, he believes new orders indexes from the Institute for Supply Management, Empire State Manufacturing Index and the March Philadelphia Fed survey are showing slowdowns.

Moreover, GDP tracking data is consistent with slow growth; the pickup in inventory has likely peaked, and gasoline prices will hit real income growth.

On the flip side of the weather argument, though, is Deutsche Bank economist Joseph LaVorgna, who believes that the weather boost has been overstated in an economy that is growing just fineon its own.

More specifically, LaVorgna said housing has been showing consistent improvement over the past seven months, independent of the weather. He points to the National Association of Home Builders Index doubling over that time period.

Moreover, he said the weekly jobless claims numbers have been on a steady trajectory lower that also predates the weather improvement.

"In general, we believe that unseasonably warm weather has been an overhyped story as to why the economy has surprised many analysts to the upside," LaVorgna said.

To prove his point, LaVorgna predicted that Tuesday's housing numberswould show better-than-consensus improvement.

Alas, he was wrong.

Where he expected housing starts to come in at 725,000, they registered just 698,000. He did understate the expected number of building permits, calling for 695,000 against an actual 717,000. Investors, though, didn't like the data, sending builder shares down more than 1 percent.

But LaVorgna also pointed out that some areas actually were hurt by the relatively balmy climate.

"Unseasonably warm weather has depressed spending on utilities and natural gas and has probably hurt other seasonal purchases such as apparel," he said. "Thus we do not want to overstate the alleged stimulus of warm weather."

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