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Top 10 reasons economy is sluggish

Weather, policy and the depth of the downturn are all weighing.

  • By Irwin Kellner,
  • MarketWatch
  • – 04/01/2014
  • Economic Insight
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PORT WASHINGTON, N.Y.— Spring may have arrived, but the economy remains frozen. Here's why:

The brutally cold winter dealt a big blow to the nascent recovery in several ways. First, there were lost sales. There were many meals not eaten out, movies and plays not seen, and gasoline not purchased, to name just a few. These cannot be made up after the economy thaws out.

Besides these, there is the lost buying power that results from the increased expense of keeping warm during the frigid weather. This has taken dollars out of peoples' pockets that otherwise might have been spent on clothes, restaurants and so on.

For example, propane prices shot up more than 50% this winter compared with last year. Natural-gas users are paying 10% more, while heating oil is up 7%, and electricity is up 5%.

Reason No. 3: There are soaring food prices. The higher cost of cultivating crops, plus shortages created by the cold weather, have driven food prices up faster than at any time in the past three years.

Fourth, as implied above, retail sales are soft, since shoppers have been unable to reach their favorite outlets, and even those who could buy purchased mainly necessities such as cold-weather gear.

Fifth, this winter has put consumers in a dour mood. The major measures of consumer sentiment and buying plans show people are unhappy — not just about the weather, but about jobs as well. And I needn't remind you that an unhappy consumer tends to be a tight-fisted one, at that.

This leads me to the next reason: The job market is still tough five years after the economy bottomed out. The unemployment rate remains historically high, and while layoffs may be down, the long-term rate of unemployment is the highest, relative to the total number of jobless, since the end of World War II.

After a nice rebound, the housing market appears to be running out of steam. True, a lot of this had to do with the winter; construction literally ground to a halt, while prospective buyers hibernated, waiting for the snow to melt. But higher interest rates and stiffer terms are factors as well, and these are not going away anytime soon.

Federal policies are not helping things, either.

On the monetary side, the Federal Reserve is sending out mixed signals. While Fed chief Janet Yellen has worried out loud about the weak economy and the concomitant high rate of unemployment, the Fed board has meanwhile approved a gradual reduction in the inflow of new money to the economy, suggesting just the opposite view.

Fiscal policy is tight as well. Notwithstanding the big budget deficit, the fact remains that it is shrinking relative to the size of the economy, and lots of federal programs and personnel have been cut to achieve this.

The Affordable Care Act, a.k.a. Obamacare, rounds out the Top 10. It is difficult for people to join, understand and navigate. It is not holding down costs but is causing many doctors and hospitals to cut back on services rendered. Of course, these higher costs are also cutting into many people's buying power, if not their health.

The bottom line: You can shave at least a percentage point off the fourth quarter's growth rate to come up with a first estimate of the first quarter's pace. Many pundits think growth will bounce back in the second quarter — but that all depends on how many of these Top 10 will be reversed.

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Copyright © 2014 Dow Jones & Company, Inc. All Rights Reserved.
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