5/6/14 – Why the Weather Hit the Economy So Hard

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 6, 2014 12:30:00 PM

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Last week, Ken Carl wrote in with a question: “Am I the only one who is pretty amazed at the effect that the weather had on our economy? I admit that we had a hard winter, but it wouldn’t be unreasonable for the same thing to happen again. Would our economy be hit once again if it did?”

Good question, Ken. Along with you and me, pretty much every economist out there was amazed at the effects of the weather. Until quite recently, when the data turned up again as the weather improved, many were skeptical that the weather was, in fact, the cause of the slowdown. No one had ever seen such a widespread, major slowdown that could be explained by the weather. Even now, as employment and other indicators improve in line with the weather, there is some doubt about the causality.

In my own mind, there’s no doubt—I simply think about my own behavior. Would I go buy a car, look at houses, go shopping, or try to build a house when the weather is seriously miserable? I would not and did not, and I don’t think very many people did. From a common sense standpoint, the weather effect simply makes sense.

Why, then, is there still resistance to seeing the slowdown as a product of the weather? The first reason, I think, is the persistent idea that we’re mired in a slump, and that any improvements are temporary and easily reversed. Such a mindset sees a snowdown as a slowdown, and is still quite common.

Second, people (and economists in particular) tend to view the economy as some sort of abstract thing in itself, separate from the underlying citizens who are actually doing things. This is an easy trap to fall into, especially for quantitative analysts, including me, who slice and dice the data regularly. It’s easy to think that the data—unemployment stats, for example—has some sort of independent existence.

It doesn’t. You can argue that there is no United States, just a bunch of people going about their lives—and by the same token, no economy, just a bunch of people buying and selling. All of the data, all of the employment—everything—it all comes down to people buying and selling.

Weather affects people. It seems reasonable that it would impact their buying and selling, and therefore the economy. Other things affect people, too, like the phase of the moon, and therefore the phase of the moon affects the stock market. (I know it’s nuts, but don’t blame me.) The idea that the weather can affect the economy, even in a major way, simply makes sense.

So could the same thing happen again? Yes, it could.

The effect was so severe this year because the weather was exceptionally bad and exceptionally widespread. Normal economic statistics and reporting are adjusted for seasonal effects, and winter data is normalized for the usual winter weather. This year, the winter was just a lot worse than usual. Given more extreme weather patterns, it’s likely that we will see more of this type of economic impact in the future.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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