Warm Winters Lead to Cold Summers

by CC April 25, 2012 12:05 pm • Commentary

Today’s durables goods report was the latest in a string of macroeconomic disappointments over the last few weeks.  This phenomenon is most easily seen by the following chart of the Citigroup Economic Surprise Index, taken from the Globe and Mail:


For the past 2 years, the upside surprises peaked in the winter, and bottomed in the summer.  This year’s path looks eerily similar so far, leading us to believe that the economic data has more to do with the seasonal adjustment process than the underlying fundamentals (or the oft-cited warm winter). Both Bloomberg and the FT ran articles a few months ago focusing on research by Goldman Sachs and Nomura which highlighted potential distortions to the economic data set from seasonal adjustments.

“The impact of the financial crisis does seem to have affected seasonal factors for several indicators,” Andrew Tilton, a senior economist at Goldman Sachs

Nomura suggest that, although the decline is indicative of a positive trend, the scale of the improvement is almost certainly being warped by those darn seasonal factors — adjustments which have been distorted by the extra-large economic shock in 2008-09.

Now that we have more data as 2012 has progressed, those distortions appear more evident than ever, particularly since nothing fundamental has presumably changed in the past 2 months (in fact, strong earnings would point to a continuation of good economic data).
We point this out because if the macroeconomic data tide is turning, the bull/bear tide might be set to turn as well, if for no other reason than elevated expectations from a “strong” winter data set.  As Bespoke posted today, is it 2010 and 2011 all over again?:
in both 2010 and 2011 the S&P 500 rallied in the first four months of the year.In 2010, the S&P 500 was up 9.2% when it reached its first half peak on 4/23.  From there, the index dropped sharply and was down as much as 10% YTD before rallying when the Fed stepped in with QE2.  In 2011, we saw a similar pattern.  When the S&P 500 reached its first half peak on April 29th, the index was up 8.4% on the year.  From there, it was a downward slide as the index fell roughly 20% through October.  Then late in the year, the market once again rallied when the Summer ended and the Fed stepped in with ‘Operation Twist.’
If so, don’t forget this post in the doldrums of late summer, when the data looks bad again, expectations have been lowered, and the winds of seasonal adjustment are about to change direction.
There’s also the question of how Bernanke and the Fed are looking at this. We’ll perhaps know more when the Bernanke attempts to answer questions cryptically later today. Will he use the appearance of a Spring slowdown to justify QE3? Or will the fact that everyone is looking at this seasonality now mean a wait and see approach? That’s the question.