Most of you are probably aware that while California experienced a warm and exceptionally dry January, the Midwest was extremely cold. What some may not realize is that weather can have a significant impact on the overall economy.
While there is always some variability in the weather, most years on a national basis the impact is not too great. However, this January was the coldest in more than 20 years for the contiguous 48 states.
There are several ways weather can impact the economy. When it is extremely cold or snowy some cities literally shut down, so basically few people are working, or going out to stores and restaurants. In addition cold weather increases heating bills, so people have less money to spend elsewhere.
It should also be noted that when economic reports come out they are seasonally adjusted. That is for major purchases such as autos and houses, there is a built in expectation for less activity in the winter. However, when winter weather is unusually severe economic activity will normally be weak.
Initial reports coming in for January are showing disappointing results. Auto sales have come in below expectations for both Ford and GM. A gauge of manufacturing activity, which had a strong reading of 56.5 in December declined to a more mediocre level of 51.3 in January. Also, sales growth at retail stores is lower in January than what was previously anticipated.
Oftentimes in the past retailers have used weather as an excuse for disappointing sales. In a normal winter, in the colder parts of the country, there will be several days where people will not be able to go out. However, this year blaming weather on poor sales appears to be more valid.
In California the weather effect would be the opposite, where economic activity should be greater than normal. This would be especially true in the construction industry, since there haven’t been any significant rain days to lessen work.
What could be a more pressing problem in California is the drought, and its impact in the Central Valley. The Midwest experienced a drought two years ago, which caused grain prices to rise significantly. If water deliveries are curtailed to farmers in a dramatic manner, we will likely see higher food prices, and even greater unemployment throughout the Central Valley.
Expectations coming into this year were for some improvement in the economy. However, the weaker preliminary January figures, along with a down stock market, is causing some concern. In general, I believe it is necessary to look at several months of data before making any conclusion about a change in trend.
For now I believe the bulk of the January weakness in the economy is weather related. Assuming that to be the case, we should get some improvement in economic activity when weather returns to normal. However, that may take some time, as the forecast for first half of February is colder than normal weather for the country.
While I believe weather is impacting the economy, I don’t believe it is having much of an impact on the stock market. Most global markets are weak and other regions of the northern hemisphere are not experiencing an unusually cold winter.
The weakness in the stock market, as I discussed previously, is not surprising given the strong performance we had last year. Expectations were very high at the start of the year, so any added uncertainty is causing the market to react negatively. I think for now, investors would be best served by keeping investments to different asset classes at normal levels.