The recent economic data have been generally weaker than expected, casting some doubt on the prospects for the recovery. However, economic recoveries are not usually associated with steady growth across sectors. Growth is inherently uneven. That means that some economic reports will be strong and some weak – and that is especially true in the current environment, where the economy has to deal with a number of serious headwinds. Economic statistics are also subject to seasonal adjustment difficulties and, as we’re likely to see in much of the February data, the peculiarities of the weather. Bad February weather will not cause a double dip, but it may add to the unease in the financial markets in the near term.

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Weekly Commentary by Dr. Scott Brown
Under The Weather
March 1 – March 5, 2010
The recent economic data have been generally weaker than expected, casting some doubt on the prospects for the recovery. However, economic recoveries are
not usually associated with steady growth across sectors. Growth is inherently uneven. That means that some economic reports will be strong and some weak –
and that is especially true in the current environment, where the economy has to deal with a number of serious headwinds. Economic statistics are also subject to
seasonal adjustment difficulties and, as we’re likely to see in much of the February data, the peculiarities of the weather. Bad February weather will not cause a
double dip, but it may add to the unease in the financial markets in the near term.
Consumer confidence fell unexpectedly in February. Monthly changes of one or two points in the headline figure are not unusual, but a 10-point plunge is hard to
ignore. The details of the report showed that evaluations of current job market conditions remained depressed. In addition, respondents were somewhat more
pessimistic about future job availability.

2. Consumers don’t spend confidence. Income, wealth, and the ability to borrow are the main drivers of spending. However, the confidence figure is reflective of
these drivers (technically, consumer confidence, by itself, does help forecast spending, but if you know income, wealth, and interest rates, consumer confidence
doesn’t add much forecasting ability). The drop in consumer confidence likely reflects broad pressures on the household sector. The estimate of 4Q09 GDP
growth was revised higher, but that report also showed a downward revision to consumer spending growth and income figures were revised significantly lower
back to the third quarter. That income revision implies, all else equal, a somewhat weaker outlook for consumer spending in the near term. Revised figures also
show a lower personal savings rate.
The estimate of personal savings is a poor statistic. Savings are not measured directly. They are calculated as a residual (income less taxes and outlays). The
savings rate is subject to large revisions. Think back to a few years ago, when it was reported that the savings rate had gone negative. Well, in revisions, that
didn’t happen. It would be nice to know what is going on with saving habits. Anecdotally, most households appear to have cut back significantly on their
spending. However, the personal savings rate was revised down to 4.1% for the fourth quarter, which seems a bit low. It’s likely that consumers have cut back on
spending because their incomes have declined (or grown more slowly).
The savings rate was a key unknown during the economic downturn. If everyone decided to save an extra 5% of their income, we would have a depression. That
extra savings implies less spending, and that spending is someone else’s income. Through a multiplier effect, overall demand would be a lot lower and aggregate
savings would actually decline (that’s called “the paradox of thrift”). With housing prices and equity investments down, it seems natural that people would be

3. inclined to start saving more for their retirements.
Ultimately, consumer spending growth will be driven mostly by income growth – and income growth depends on jobs. There’s a clear seasonal pattern in
private-sector payrolls. Most new hiring occurs between February and June. The jobs data for February are expected to be distorted by the weather. The next few
months will tell the tale. Yet, as Fed Chairman Bernanke testified last week, it’s uncertain whether economic growth will be strong enough to generate much
growth in jobs this year.
Investors are not going to get much clarity in the upcoming economic data. Yet, the figures are unlikely to suggest convincingly that we’re off the moderate
recovery path.