U.S. ECONOMY: Is all that growth just hot air?

After a weak patch in the fall, the U.S. economy is heating up. Job growth, retail spending, industrial output and even the housing market have all perked up.

What's not clear is whether it's just the warm weather we've been having or whether the economic fundamentals have improved.

This could see it as to be the first sign of a recovery [in housing] -- or as I see it, a blip.

November was about 2 degrees warmer than usual, while December was 4 degrees warmer and the warmest in 50 years. Temperatures remained mild in the most of the East for the first half of January as well.

The calendar says it's winter, but tell that to the cherry trees blooming in Washington and to the construction workers busy starting houses in New England.

The economy has certainly benefited from the warm weather. Energy prices have tumbled on reduced demand, freeing up cash for other purposes. Ground-breaking on new homes increased in November and December. Fewer workers are losing their jobs.

Some of the boost from the weather is real, but some of it is economic activity that's just been borrowed from the spring months. We probably won't know for several months how much it is real and how much of it is just people taking advantage of a few warm days to do now what they planned to do in March.

Whatever its cause, the burst of economic activity has lessened the pressure on the Federal Reserve to cut overnight interest rates to stimulate the economy. In essence, warm weather, falling gas prices and lower long-term interest rates have provided the stimulus many thought the Fed would have to provide.

In October and November, more than 80% of the economic data came in below expectations, but since the first of December, more than 50% of the data have been stronger than expected.

Changing rate expectations

The federal funds futures market now anticipates no rate cuts in the first half of the year and just one cut by the end of the year. For a brief moment, the market was even pricing in a 2% chance of a rate hike in March. By contrast, six weeks ago, the market was certain of one rate cut by July and was leaning toward three by the end of the year.
Those who've been forecasting that the next Fed move would be another rate increase are crowing.

Some will argue, of course, that warm weather was the main reason builders initiated more construction, as I do.

The discussion now is whether builders are (or are not) going to take on more construction loans, pay off contractors and put up new homes just because the weather has turned warmer.

"The worst for manufacturing may have passed last fall. With auto output stabilizing and firms related to housing presumably having made the bulk of the necessary adjustment to the slower pace of building, the manufacturing sector may be able to get back to modest growth in the months to come."... I don't know what you think, but I don't eat it.

Bears are sticking to their guns in the face of the stronger data, however.

I see the Fed cutting rates to 4% by the end of the year. I worry that an economic rebound now raises the risks of a harder landing later, as the Fed overreacts to higher inflation by raising rates, ignoring the bomb shell that's still ready to explode as weakness in the housing market saps the willingness and capacity of U.S. households to borrow.