The economy slowed at the start of the first quarter but much of it may have been weather related.

Recap of US Markets

STOCKS

Despite weak economic news, equities rose notably this past week.

At the start of the week, shares were down in early trading but managed to shed losses and end the day slightly higher as investors waited for testimony from Federal Reserve Chair Janet Yellen.  Prior Friday’s employment numbers continued to weigh on stocks.  On Tuesday, stocks rallied significantly as the House of Representatives approved legislation that extends Treasury’s borrowing authority.  Also, Federal Reserve Chair Janet Yellen in testimony before the House of Representatives said she would not make any changes to the Fed’s “measured steps” schedule for reducing its stimulus.

Stocks were mixed at mid-week ahead of Fed Chair Yellen’s scheduled second day of Congressional testimony in the Senate.  With little economic news, equities essentially paused after Chair Yellen’s first public testimony on Tuesday. On Thursday, acquisition activity outweighed a slight rise in initial jobless claims.  Also, bad news was good news regarding retail sales.  Comcast agreed to acquire Time Warner Cable.  Soft retail sales numbers were seen as keeping the Fed from accelerating unwinding from loose monetary policy.  At week’s end, favorable corporate news trumped weather damped manufacturing output.    

Equities were up notably this past week. The Dow was up 2.3 percent; the S&P 500, up 2.3 percent; the Nasdaq, up 2.9 percent; the Russell 2000, up 2.9 percent; and the Wilshire 5000, up 2.4 percent.

For the year-to-date, major indexes are down as follows: the Dow, down 2.5 percent; the S&P 500, down 0.5 percent; the Russell 2000, down 1.2 percent; and the Wilshire 5000, down 0.2 percent.  The Nasdaq is up 1.6 percent.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

BONDS

Most Treasury yields ended the week up modestly.  Bond traders, however, interpreted Fed Chair Yellen’s comments differently than equity traders.  After little change Monday, rates firmed moderately Tuesday after Fed Chair Yellen stated in Congressional testimony that quantitative easing will continue in measured steps after each FOMC meeting unless exceptional data indicate otherwise.  Yellen’s testimony continued to impact yields on Wednesday, leading to modest additional firming in rates.

Yields declined somewhat on Thursday as retail sales were down more than expected and initial jobless claims rose.  Rates were little changed on Friday despite a sharp drop in industrial production.

For this past week Treasury rates were up as follows: the 2-year note, up 1 basis point; the 5-year note, up 5 basis points; the 7-year note, up 4 basis points; the 10-year note, up 6 basis points; and the 30-year bond, up 2 basis points. The 3-month T-bill reversed from last week after progress on extending the federal debt ceiling, declining 7 basis points.

OIL PRICES

The spot price of West Texas Intermediate was basically flat for the week.  Economic news had essentially no impact on crude as swings in monthly data were seen as weather related.  Traders focused on beyond winter months.

Net for the week, the spot price for West Texas Intermediate was essentially unchanged, nudging up 32 cents per barrel to settle at $100.20.

The Economy

The first quarter of 2014 is not getting off to a good start with soft numbers for retail sales and industrial production.  The key question is whether softness was due to atypically adverse weather or fundamentals.

Retail sales unexpectedly drop notably in January

The consumer sector is not doing very well but it may be due to atypically adverse weather.  Overall retail sales in January fell 0.4 percent, following a decrease of 0.1 percent in December.  A key point of the latest report is the December downward revision—it originally was up 0.2 percent.

Autos pulled down the total.  Motor vehicle & parts declined 2.1 percent, following a decrease of 1.8 percent in December.  Excluding autos, sales were unchanged after gaining 0.3 percent the month before.  Adverse weather discouraged consumers from going to auto dealers.

Gas station sales increased 1.1 percent after jumping 1.5 percent in December.  Excluding both autos and gasoline, sales slipped 0.2 percent after rising 0.1 percent in December. 

In the core, strength was seen in electronics & appliance stores; building materials & garden equipment; and grocery stores.  Declines were seen in furniture & home furnishings; health & personal care; clothing; sporting goods, hobby, et al; department stores; nonstore retailers; and food services & drinking places.

The latest report suggests that fourth quarter GDP may be revised down and that first quarter GDP could be soft.  Again, atypically adverse weather likely affected the data.

JOLTS shows little progress in labor market

Improvement in the labor market is very slow, according to the latest Job Openings and Labor Turnover Survey.  There were 3.990 million job openings on the last business day of December, down slightly from November's 4.033 million. The hires rate and separations rate were little changed in December, both at 3.2 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by geographic region.

The number of openings was little changed in total private and decreased in government. The number of job openings decreased in health care and social assistance; arts, entertainment, and recreation; and state and local government. The Midwest region experienced a decline in job openings in December.

There were 4.437 million hires in December, little changed from November. The number of hires was essentially unchanged for total private and government. The number of hires was little changed in all industries and in all four regions.

There were 4.370 million total separations in December, little changed from November. The number of total separations was essentially unchanged for total private and government. In December, the quits rate was little changed at 1.7 percent for total nonfarm. The rate was little changed for total private (1.9 percent) and unchanged for government (0.6 percent). The quits rate decreased over the month for accommodation and food services and was little changed in all four regions.

Consumer sentiment holds steady in early February

Consumer sentiment remains steady as a weather-related dip in current conditions was offset by a rise in expectations. The composite index was at a higher-than-expected 81.2 for the mid-February reading, unchanged from final January and up 8 tenths from mid-January.

The present situation component, which is an important component that offers an early reading on how February is shaping up vs January, slipped 2.8 points from final January to 94.0. The decline was not that dramatic but does take the component to its lowest level since November.

The expectations component is up 1.8 points from final January to 73.0 which is the highest reading since August. This suggests that consumers are increasingly upbeat about their job and income prospects, which is perhaps a surprise given how weak employment and wage data have been.

On the inflation front, gas prices have been inching higher reflected in a 2 tenths rise in 1-year expectations to 3.3 percent. The 5-year reading is unchanged at 2.9 percent.

February's weather, which so far has been even more severe than January, has been weighing on the consumer.

Industrial production drops in January

Manufacturing data are pointing to a sluggish first quarter.  The manufacturing sector is losing traction—weather related or not.  Overall industrial production fell 0.3 percent in January, following a 0.3 percent gain the month before.  Analysts expected a 0.3 percent rise for the latest month.

Turning to major components, it was worse for manufacturing which dropped 0.8 percent after a 0.3 percent increase in December.  The consensus projected a 0.1 percent increase for January.  Atypically adverse weather helped the overall number from being weaker as utilities jumped 4.1 percent in January, following a 1.4 percent dip the prior month.  Mining slipped 0.9 percent after gaining 1.8 percent.

Looking at detail for manufacturing, durables fell 0.8 percent in January, led down by a 5.0 percent drop in motor vehicles and parts.  Nondurables declined 0.8 percent in January.

Manufacturing excluding motor vehicles decreased 0.5 percent in January, following a 0.3 percent rise in December.

Capacity utilization declined to 78.5 percent from 78.9 percent in December.

The latest report adds to the argument that the first quarter will be sluggish.  It also calls to attention whether the Fed will pause in its “measured steps” for tapering quantitative easing.  But the Fed clearly will watch the next employment report before making that decision in mid-March.

The bottom line

Atypically adverse weather appears to have weighed on retail sales and industrial production.  There will not be certainty on this until data based on typical weather are released.  This likely means data for February or even March.  Meanwhile, the Fed will have to sort out weather effects from underlying strength or weakness in the economy.  Uncertainty clearly is higher due to weather.

Looking Ahead: Week of February 17 through 21 

Housing and inflation numbers are in the spotlight this week.  Housing sales have wavered but homebuilders have been a little optimistic despite firming in mortgage rates.  Updates are to be posted for NAHB housing market index, housing starts, and existing home sales.  Inflation at the producer and consumer level has been subdued, allowing the Fed to keep policy loose. We get news at both levels this week. But for the PPI, the composition of the index has been reformulated to include services and construction. The old series has been discontinued. The focus now will be on final demand.

Monday 

U.S. Holiday: Presidents’ Day. Bond, Equity Markets Closed

Tuesday

The Empire State manufacturing index was solidly positive for January, jumping to 12.51 from December's revised 2.22 to indicate significant month-to-month improvement in general business conditions.  And the improvement included new orders which were at 10.98 from December's minus 1.69. The gain points to upcoming strength for shipments and other readings including employment. Employment was already on the rise, opening the year with a big jump to 12.20 from zero in December.

Empire State Manufacturing Survey Consensus Forecast for February 14: 8.5

Range: 5.0 to 18.5

The NAHB housing market index was steady and solid at 56 in January versus 57 in December. The index came in at 54 in the two prior months.  The report's three components all declined versus December, but only marginally. The present sales index at 62 remained the leading component and points to extending strength for new home sales. The outlook for future sales was right behind at 60 with traffic lagging badly at 40. Weakness in traffic contrasts with the strength in sales and reflects the high proportion right now of all cash deals.

NAHB housing market index Consensus Forecast for February 14: 56

Range: 54 to 58

Wednesday

Housing starts declined in December but the decrease was after a surge in November.  Housing starts decreased 9.8 percent after spiking 23.1 percent in November.  The December starts annualized level of 0.999 million units was up 1.6 percent on a year-ago basis.  The drop in starts was led by the multifamily component which fell 14.9 percent after jumping 30.4 percent in November.  The single-family slipped 7.0 percent, following a 19.5 percent boost the prior month.  Permits suggest temporary slippage in the housing sector.  Overall permits decreased 3.0 percent, following a 2.1 percent dip in November.  The 0.986 million unit pace was up 4.6 percent on the year.  Atypically adverse winter weather may have played a role in slippage for starts and permits for December.

Housing starts Consensus Forecast for January 14: 0.950 million-unit rate

Range: 0.899 million to 1.000 million-unit rate

Housing permits Consensus Forecast for January 14: 0.975 million-unit rate

Range: 0.925 million to 1.015 million-unit rate

The producer price index in December was up 0.4 percent as expected and was up 1.2 percent from December 2012. However, core PPI (excludes food and energy) was up a greater than anticipated 0.3 percent and 1.4 percent on the year.  Food prices dropped 0.6 percent on the month thanks to lower prices for both vegetables and meat. However, energy prices jumped 1.6 percent. Gasoline prices were up 2.2 percent, the biggest jump since August.  Among the sub-categories influencing December's increase in the core PPI were tobacco prices (up 3.6 percent), pharmaceuticals (up 0.5 percent) and light trucks (up 0.5 percent).

SPECIAL NOTE: Beginning with the report for January 2014, the methodology of the producer price report changes dramatically.  It will include intermediate and final demand classifications dominated by services, weighting traditional core less. The new format is not comparable to the prior methodology but the BLS does have a few years of data under the new format.

PPI Consensus Forecast for January 14: +0.2 percent

Range: -0.2 to +0.4 percent

PPI ex food & energy Consensus Forecast for January 14: +0.2 percent

Range: 0.0 to +0.3 percent

The Minutes of the January 28-29 FOMC meeting are scheduled for release at 2:00 p.m. ET.

Traders will be parsing the minutes to see how ingrained “measured steps” in QE are relative to being data dependent.

Thursday

The consumer price index at the headline in December warmed up to a 0.3 percent gain after a flat reading in November. The CPI excluding food and energy softened to a 0.1 percent gain, following a rise of 0.2 percent the month before.  The energy component rebounded to 2.1 percent, following a decline of 1.0 percent in November. Gasoline increased 3.1 percent after a drop of 1.6 percent the prior month. Food price inflation held steady with a 0.1 percent month rise.  Within the core, the shelter index rose 0.2 percent in December after a 0.3 percent increase in November. The apparel index rose 0.9 percent in December but followed significant declines in each of the three previous months.  The new vehicles index was unchanged in December, as was the medical care index.  The airline fares index declined sharply in December, falling 4.7 percent after increasing in recent months. The indexes for recreation, for household furnishings and operations, and for used cars and trucks also fell in December.

CPI Consensus Forecast for January 14 +0.1 percent

Range: 0.0 to +0.4 percent

CPI ex food & energy Consensus Forecast for January 14: +0.2percent

Range: +0.1 to +0.3 percent

Initial jobless claims were up 8,000 in the February 8 week to a higher-than-expected 339,000. The 4-week average was up 3,500 to a 336,750 level that was little changed from the month-ago trend.  Continuing claims, which are reported with a one week lag, also look flat though they did dip 18,000 in data for the February 1 week to 2.953 million. But the 4-week average is up for a ninth straight week, to 2.970 million which is more than 40,000 higher from a month ago. The unemployment rate for insured workers, which was at 2.1 percent as recently as November, was at 2.3 percent for a fifth straight week.  Heavy weather may be at play in this report and other reports that are showing a stalling for the economy.

Jobless Claims Consensus Forecast for 2/15/14: 335,000

Range: 315,000 to 345,000

The Markit PMI manufacturing index (final) posted a final January reading of 53.7, unchanged from the flash reading at mid-month and down 1.3 points from final December.  Weakness in order readings was the key negative in the January report. Monthly growth in new orders slowed 2.1 points from final December to 53.9 which, nevertheless, is a respectable rate. The other two order readings in the sample, however, moved below 50 and into contraction in the month with new export orders at 48.4 for a 3.0 point loss and backlog orders down 3.6 points to 49.2.

Markit PMI manufacturing flash index Consensus Forecast for February 14: 53.5

Range: 52.8 to 55.0

The general business conditions index of the Philadelphia Fed's Business Outlook Survey rose to 9.4 from a revised 6.4 in December but new orders slowed to 5.1 from December's 12.9 and November's stand-out reading of 14.0.  But a big plus in the report was a 5.6 point gain in employment to 10.0 in what hints that manufacturers, who are always reluctant to hire, are confident enough in their order pipeline to expand their workforces.

Philadelph.0ia Fed survey Consensus Forecast for February 14: 8.0.

Range: 2.0 to 12.0

The Conference Board's index of leading indicators softened a bit in December, rising only 0.1 percent, but it followed a very strong and upwardly November at plus 1.0 percent.  Positives in December included further strength for credit conditions which points to a long awaited rise in borrowing. The report's yield spread was once again the leading component, in a counter-intuitive signal as the spread increase was due to a rise in long rates instead of a decline in short rates.  The spread component was responsible for a 0.31 percentage point contribution.  On the negative side were unemployment claims which, however, have since been coming down and look to be a positive for the January report. Building permits were a negative as was consumer expectations.  Other readings included a slowing in the coincident index, to plus 0.2 percent from November's 0.4 percent, and a rise in the lagging index to plus 0.3 percent from no change in November.

Leading indicators Consensus Forecast for January 14: +0.2 percent

Range: -0.2 to +0.5 percent

Friday

Existing home sales bounced back in December from a very weak November but not by much, at plus 1.0 percent for a slightly lower-than-expected annual rate of 4.87 million units.  Lack of supply is still an issue—holding back sales.  The outlook for future sales is not good, at least based on available supply of homes on the market which fell sharply to 4.6 months from 5.1 months in November.  All cash buyers are king in the home sector, making up a steady 32 percent of existing home sales. In contrast, first-time buyers are on the decline, at 27 percent vs 28 percent in November.

Existing home sales Consensus Forecast for January 14: 4.65 million-unit rate

Range: 4.48 to 4.85 million-unit rate

R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.

He can also be found on a weekly broadcast talking about the U.S. economy, the easiest way to find him is by going to iTunes and searching for "Simply Economics."

Econoday Senior Writer Mark Pender contributed to this article.