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Friday August 28th, 2015 11:03PM

Hopes up for sunnier US economy once winter fades

By The Associated Press
WASHINGTON (AP) -- When the weather warms up, so, too, will the U.S. economy.

That, at least, is the prevailing view of economists, who shrugged off a government report Friday that the economy was weaker last quarter than first thought.

Severe winter weather is probably slowing growth again this quarter. But as the chill and snow fade into memory, long-delayed spending by consumers and businesses could invigorate the economy starting in spring.

"Weather is having an impact on a lot of the data," said Doug Handler, chief economist at IHS Global Insight. "We will likely see a boost from pent-up demand in coming weeks."

In the view of most analysts, the snowstorms and extreme cold have exerted a harmful but only temporary effect on the economy. That belief helps explain why Federal Reserve Chair Janet Yellen signaled this week that the Fed will likely continue reducing its stimulus for the economy throughout 2014.

The Commerce Department said Friday that the economy grew at a 2.4 percent annual rate last quarter, in part because consumers didn't spend as much as initially estimated. Initially, Commerce had estimated that the economy expanded at a 3.2 percent rate in the October- December quarter.

One reason the government initially overestimated growth for last quarter was that it didn't fully take account of how much bad weather would dampen spending on long-lasting goods such as autos.

Last quarter's increase in the gross domestic product - the economy's total output of goods and services - was the weakest showing since the first quarter of last year. And it was down sharply from a 4.1 percent growth rate in the third quarter.

Economists had long expected growth to slow in the final quarter of 2013 and the first quarter this year compared with the third quarter of last year. In part, that's because GDP growth during last year's third quarter was fueled by an unsustainable buildup in company stockpiles that would need to be worked down.

But analysts said the slowdown has been magnified by a succession of winter storms that have disrupted economic activity - from forcing temporary closings of Macy's and other department stores to depressing sales at McDonald's restaurants. Home Depot Inc. said it lost $100 million from bad weather in January.

The damage from consumer spending has been especially acute because it accounts for about 70 percent of economic activity. Economists foresee further spending weakness in the first three months of this year largely because of the weather.

"Due to Mother Nature, quarter one is not going to be anything worth writing home about," Jennifer Lee, senior economist at BMO Capital Markets, wrote in a research note. "The rebound ... and all of that pent-up demand won't show up until the second quarter."

Lee predicted a tepid economic growth rate of around 1.7 percent this quarter.

A separate report Friday also provided hope for a stronger economy in coming months. The University of Michigan's monthly index of consumer sentiment showed that while bad weather kept consumers away from retail outlets, it hasn't shaken their confidence.

The index posted a reading of 81.6 in February, up slightly from January's 81.2. The survey found that the cold weather had the biggest effect among consumers over age 65, who tended to worry about higher utility bills. By contrast, consumers under age 35 felt better able to offset higher utility payments with income gains.

The Michigan survey found that while the weather had made trips to the store more difficult, many purchases had been postponed rather than canceled.

"Consumers have displayed remarkable resilience in the face of the polar vortex as well as higher utility bills," said University of Michigan director of surveys Richard Curtin.

In particular, analysts think auto purchases that were put off last year will recover as warmer weather draw buyers back to showrooms.

One area of encouragement in Friday's report was the government's estimate of business investment. It was revised up to an annual rate of 7.3 percent - the best quarterly showing in a year and sharply higher than the initial 3.8 percent estimated rate.

For all of 2013, the economy grew at a lackluster 1.9 percent. Analysts think growth will rebound in 2014 to as high as 3 percent.

Growth was held back last year by higher federal taxes and government spending cuts enacted to combat budget deficits. Economists estimate that the squeeze from the government subtracted about 1.5 percentage points from growth last year. If growth does reach 3 percent this year, it would be the strongest performance since the recession ended almost five years ago.

Handler said he looked for growth to improve to an annual rate above 3 percent in the second half of this year as the economy gains traction.

After enduring the deepest downturn since the Great Depression of the 1930s, the economy has struggled to accelerate. The weak growth has made it difficult for people who lost jobs during the downturn to find work. Over the past four years, economic growth has averaged an anemic 2.2 percent.

The revisions in fourth-quarter growth resulted from updated data that the Commerce Department didn't have when it made its first estimate a month ago. Commerce will make one final estimate of fourth-quarter GDP growth next month.

Though the biggest factor in the downgraded estimate of fourth-quarter growth was consumer spending, the number was also depressed by reductions in estimated growth in exports, business stockpiles and government spending.

Government activity was a big drag in the fourth quarter, subtracting 1.1 percentage points from growth. The federal government accounted for 1 percentage point of that reduction, reflecting lower defense spending.

Yellen said Thursday that the Fed still expects the economy to strengthen this year. But she told the Senate Banking Committee that the Fed will be studying the data to make sure the slowdown is just a temporary weather phenomenon.

The Fed is gradually reducing its monthly bond purchases, which have been intended to keep long-term loan rates low to encourage spending and growth. Many economists think that as long as the economy keeps improving, the Fed will keep cutting its bond purchases this year before ending them in December.
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