It’s chillingly clear the weather has been brutal this winter, and undeniable the cold and storms have stalled parts of the U.S. economy. What isn’t known – or knowable – is exactly how much the deep freeze and snowy streets have restrained economic activity.
This will be a lasting source of confusion, debate and excuse-making among economists, investors and business executives for months, complicating the interpretation of every fresh economic-data release and the handicapping of the Federal Reserve’s response to them.
As Lauren Lyster and I discuss in the attached video, the second-coldest winter since 1970, with 66% more snow than last year, has been cited by automakers for a January decline in car sales and the unforeseen drop in the ISM manufacturing index Monday, which was a catalyst of that day’s 2% stock-market slide.
Natural-gas bills will surge by 73% this winter, according to analysts at Sterne Agee, resulting in a potential 6% drag on consumer spending lasting into the spring, with particularly dramatic effects in the Midwest and Northeast. Casual-restaurant customer traffic fell more than 4% in January, according to industry trackers.
Investors are hoping the employment report for January on Friday will confirm broad suspicions that December’s surprisingly weak 74,000 new-job gain was mostly undercut by severe cold that month. The consensus forecast is for 185,000 new jobs in January.
But might the January chill have cost the economy some payroll gains, too? How should Wall Street interpret another weak report well below the past year’s trend?
The ADP private-payrolls release today was a modest shortfall versus forecasts, estimating 175,000 additions to the worker ranks. Mark Zandi, chief economist at Moody’s Analytics and a participant in the ADP data-crunching, said in the latest release: "Cold and stormy winter weather continued to weigh on the job numbers. Underlying job growth, abstracting from the weather, remains sturdy."
And yet, among the stronger segments of the latest report was construction, which added 25,000 employees in the month.
This is the kind of dissonant message being heard in nearly all the economic inputs of the past few months. Retailers notoriously resort to the excuse of bad weather when sales disappoint.
Even the claims of Ford Motor Co. (F), Toyota Motor Co. (TM) and others about the freeze-out of would-be car buyers has been questioned by analysts, as Bloomberg reports.
And while the majority of analysts and the ISM sponsors themselves attribute much of the steep decline in ISM factory activity to weather, J.P. Morgan Chase (JPM) economist Michael Feroli counters there is little underlying evidence bad weather was an important swing factor.
One thing for sure is that sub-zero temperatures in Minnesota last month had exactly nothing to do with the slowdown at Chinese factories, the strengthening of the Japanese yen or the stressed currencies of emerging markets such as Turkey and Argentina – all factors in global stock markets’ retreat from risk so far this year.
This inconclusive, unsatisfying flow of economic evidence will be with us for a while, most likely. The broad consensus entering 2014 was that the global economy was poised to accelerate, with most geographic blocs pitching in. Now that the U.S. economy has generally failed to validate those hopes with clear signs of a quickened pace, the weather-as-wild-card leaves analysts at loose ends in figuring out how much of the softness is “real” rather than trivial and fleeting.
This enters the discussion of Federal Reserve policy under brand-new Chair Janet Yellen, who assumes the lead role several weeks after the Fed began the process of “tapering” its monthly rate of asset purchases – so far by $10 billion to $75 billion in December, and then to $65 billion last month.
Fed officials’ recent rhetoric has suggested they would need to see persuasive evidence of a pronounced, lasting slowdown in job production and other growth measures before re-evaluating its tapering intentions. The indeterminate role of nasty weather in the softer economic performance so far this quarter could allow the Fed to downplay weak data and keep reducing stimulus efforts longer than it otherwise would.
This could leave investors repeating the old line, “Everyone complains about the weather but nobody does anything about it.”
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