You have to wonder if there weren't a lot of erasers and white-out bottles feverishly flying around around the Federal Reserve's boardroom Wednesday morning.
In the midst of a two-day meeting of the Fed's monetary-policy body (the Federal Open Market Committee) – and just hours ahead of the release of the FOMC's updated statement on its policy stance – the U.S. economy threw the central bankers a filthy knuckleball. The first estimate of U.S. gross domestic product growth for the fourth quarter showed a shocking contraction of 0.1 per cent – nowhere near the 1.1-per-cent annualized growth rate that economists had anticipated. Clearly, it was also nowhere near what the Fed anticipated, either; economists say the fourth-quarter numbers peg 2012 GDP growth at just 1.5 per cent, short of the Fed's projection of 1.7 to 1.8 per cent that it issued just five weeks ago.
We'll never know what the FOMC's statement was going to say before this little economic bomb landed in the committee's lap. What we do know is that its policy statement began with "Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months." In journalistic parlance, the story may have been hastily re-topped.
Yet, despite the economic disappointment, the rest of the FOMC's story remains remarkably consistent with what it was saying in mid-December. The Fed, clearly, isn't ready to blink on one bad quarter of GDP numbers.
And its reasoning can be summed up in two data-confounding words: Hurricane Sandy.
The FOMC blamed much of the economic pause on "weather-related disruptions and other transitory factors." And, obviously, Sandy – which slammed the U.S. eastern seaboard in late October – was the weather-related disruption big enough to throw economic activity off course.
At this risk of saying "I told you so," we did warn in RoB Insight when Sandy hit that it would distort U.S. economic data for both October and November. That's two-thirds of the fourth quarter. While the impact of Sandy on the economic indicators was far from crystal-clear as the quarter progressed (sometimes appearing to have a significant influence, sometimes little or none at all), it now looks evident that the bottom-line GDP numbers have a big Sandy asterisk next to them.
Indeed, at the time of Sandy's landfall, economists mused that its impact on GDP would probably be somewhere in between Hurricane Katrina (an estimated 1-percentage-point drag on 2005's growth) and Hurricane Irene (estimated at 0.1-percentage-point drag in 2011). Given that the damage inflicted by Sandy was closer in scale and dollar value to that of Katrina than of Irene, it's not unreasonable to suppose that its drag on GDP could have been more than half a percentage point. Remove the storm from the equation, and the 2012 growth number may not be a disappointment at all.
Unfortunately, a lot of this is guesswork, especially for economists trying to gauge a storm's economic influence only weeks to a couple of months after the event. But the Fed, it appears, is convinced that the impact may have been significant enough that it is willing to give a free pass to a quarter showing a small GDP contraction. It won't be fiddling with policy until the storm clouds clear from the data.