Another Keynesian Myth Refuted: Cold Winters Do Not Shrink The Economy

Tyler Durden's picture

Submitted by Devin Leary-Hanebrink via the Ludwig von Mises Institute,

In February, the Federal Reserve made a cursory observation that the unusually severe winter was partly to blame for the stagnant pace of the US economy. The news media, ranging from liberal to conservative, all highlighted the Fed’s report and provided their respective “spin” on how the weather damages the economy. But soon enough, focus turned back to the brutally cold temperatures and not winter’s economic impact.

Recently, however, the Commerce Department reported that the US economy actually contracted 2.9 percent in the first quarter of 2014. This was the Department’s third attempt at revising its figures, with previous reports estimating first 0.1 percent growth and then a 1.0 percent contraction. While this little statistical “revision” was inconvenient, it was quickly followed (in true Orwellian fashion) by a slew of reports confirming that the economy has already rebounded and the second quarter will be even better than previously anticipated. (According to an advanced estimate released last week by the Bureau of Economic Analysis, GDP increased 4.0 percent in the second quarter and the first quarter’s numbers were revised yet again.)

Naturally, the “blame the weather” campaign popped up again. In fact, Gus Faucher, Vice President and Senior Macroeconomist with PNC in Pittsburgh, estimates that over half of the contraction can be blamed on the severe winter weather. Well, this certainly begs the question, “Can weather actually cause the economy to contract?”

Weather obviously affects the economy. However, the claim that weather can actually drag down the economy is dubious at best. While severe winter weather may slow construction, idle auto sales, and reduce ice cream consumption, the economy never goes into hibernation. Instead, economic activity simply shifts.

A great analogy is household consumption spending. Each month, the average household allocates a certain amount of disposable income to entertainment. How this money is spent — at restaurants, traveling, shopping malls, or the theater — is irrelevant. The point is that people tend to budget a relatively fixed amount of income toward leisurely pursuits. If a new restaurant opens to rave reviews or a blockbuster movie debuts, a young couple does not drastically increase their monthly budget to accommodate the new entertainment options. Instead, consumption spending may shift from the mall or the theater to dinner and a movie. Similarly, a family that is planning a big vacation or a day at the ballpark either budgets additional savings throughout the year or scales back other expenses. To assume that new retail options magically increase spending is flawed economics.

Likewise, severe winters merely shift economic activity. While it’s true that companies may postpone construction projects and consumers will spend less time outside, the economy does not grind to a halt.

Instead, companies often use the post-holiday lull to complete annual inventory, update quality control initiatives, or install new technology. Further, while some retailers like ice cream vendors, department stores, and restaurants may see sales slump, others will inevitably see sales increase because consumers tend to stay indoors, dine at home, stock up on emergency supplies, and watch more television. In more real terms, Ben & Jerry’s and Baskin-Robbins may suffer, but Amazon, Netflix, and the local grocery store might see sales spike. This cyclical effect is natural.

There are spillover effects, as well. More movie downloads boosts the telecommunications industry. Trips to the grocery store and internet purchases mean more deliveries, which means work for the shipping giants (even after accounting for weather delays). What’s more, the economy is so interconnected that an increase in cold weather deliveries inevitably means additional strain on trucks and equipment. This, in turn, may help hardware stores, mechanics, and parts distributors. Not to mention that severe winter weather inevitably leads to increased spending on utilities, snow removal, and industrial equipment, like plows, snow blowers, and chainsaws. These spillover effects go on and on.

In addition, every winter there is always an uptick in travel as people escape the bitter cold, which raises revenues for the airline and tourism industries. Meanwhile, some travel destinations actually embrace winter’s cold. In fact, this past season, most ski resorts in the United States opened earlier and had their best season in years. (Predictably, this summer’s unseasonably cool temperatures are being blamed for dismal attendance at pools and resorts across the country.)

Finally, economic growth and consumption spending are not intrinsically connected. Purchasing power does not evaporate just because spending may slow during the cold winter months. Instead, saving increases investment opportunities and may boost the bottom line for companies like Wells Fargo, Edward Jones, and E*TRADE. This may, in turn, boost the stock market and possibly even the share price of Unilever and Dunkin' Brands (the corporate parents of Ben & Jerry’s and Baskin-Robbins) even when consumers are craving hot chocolate over ice cream treats.

While weather may affect the economy, the recent contraction has little to do with winter’s bitter cold; the US economy is far too diverse and complex. Instead, we are witnessing the ongoing effects of failed monetary and fiscal policies. As the Wickersham Commission noted years ago, “These laws [of economics] cannot be destroyed by governments, but often in the course of human history governments have been destroyed by them.”

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BuddyEffed's picture

As the dollars pile up behind the dam the FED has constructed and get deeper and deeper, eventually the stresses become large enough to trigger release of the faults and quakes of varying magnitude can occur. Just prior to structural failure, helicopters can and may be used in attempts to relieve the backpressure created with an airlift of the dollars, since as no engineers were involved in the dams planning and construction, no spillways or turbines were ever included in the dam design.

A Nanny Moose's picture

The real problem is that economies, much like governments, DO NOT EXIST. All of it is but an abstraction. Abstractions are good for taking advantage of the fears of "the people."

But the people do not exist.

Dr. Engali's picture

I've always maintained that people pull sales forward in the advance of a snowstorm. They fill the stores and then empty the shelves, then once the worst is passed, they fill the stores again because of cabin fever. Not to mention people can shop online while cooped up. I did fail to factor in the fact that people can download movies and books to entertain themselves, which makes the claim that cold winters impact economic activity even more dubious.

falak pema's picture

Now what would George C have to say on that?

blu's picture

The laws of economics...

ha ha ha ha HAHAHAHA ha ha ha! <snicker> Ha ha haHAH HAH haha haha <snort> gegegegege HAHAH!

froze25's picture

I have come to expect the FED and the media will do what ever the feel will change people's perspectives to them perception equals reality.  The issue they dont see or want to admit,  at least publicly is that the fundamentals of the economy suck.  Paper pushing is a drag on commerce it will never create wealth no matter what accounting scheme the use for there balance sheets. Tangible creation of tangible goods or raw materials creates wealth. 

NOTaREALmerican's picture

It should be pretty simple to correlate GDP with temperature if there is any doubt, one way or the other.  

disabledvet's picture

Well..obviously if there are seasonal effects you can simply do seasonal adjustments...simply measuring one winter against the next...which of course is exactly what happens.

Actually Winter far from being bad for an economy is in my view an unalloyed good. Cold weather increases production and makes more efficient use of energy. Definitely has an impact on the transportation industry...but we have an interstate highway system so not really all that much anymore.

Also building trades must be far more advanced in Northern climes...full basements, garages, land clearing...everything the survivalist needs to make it to the next year.

Too cold outside? Sleep with your sheep if you have too...

youngman's picture

I call it the spill out effect...but there are probably a few more births 9 months later after a cold spell...

Reaper's picture

The government and media think for you.

Dr. Engali's picture

My pecker does the thinking for me.

GooseShtepping Moron's picture

This is one instance in which I'll have to part company with the Ludwig von Mises Institute. While it's true that a forecast of a good blizzard will pull certain sales forward (believe me, as a former grocery guy I know this very well; but the sales plummet after that and the net effect is a wash), and it's true that people today can do a lot of their shopping online (but good luck with that during a power outage), a bad winter is not just a temporary weather problem: It's a slow-motion natural disaster on a gigantic scale.

Austrians are supposed to be notable for not believing in the broken windows fallacy (as well they shouldn't), but I don't understand why they fail to see that a bad winter is a broken windows event on steroids, and it really does hurt the economy. Property gets damaged, vehicles get chewed up; events get cancelled or rescheduled, travel is a nightmare, logistics are blown to hell; livestock freeze, reduce their output, or require extra heating and feeding to make up for lost foraging opportunities, planting season can be delayed; workers are unable to get to their jobs due to snow and blocked roads, wages are lost, productivity declines.

All of the above is just a representative sampling of the effects of a bad winter. Does the author really think that spending will just "shift" around such problems? I'm sorry, but that is absurd. The dearth of thriving city centers above 60 degrees latitude ought to be enough to convince one that normal human activity cannot carry on well in the presence of never ending snow, darkness, and subzero temperatures, the wondrousness of notwithstanding. I am generally in agreement with Austrian economists, but sometimes they try to prove way too much.

mrmeland's picture

Eh I think your point is very correct but you're drilling down a layer deeper than the author intended. I'm sure he's very much aware of the broken window fallacy but he's merely pointing out that weather shouldn't affect GDP all that much. We know very well that, as I'm sure he does, that the GDP calculation is probably a terrible way to measure the actual health and productivity of an economy. He's saying weather shouldn't affect the GDP spending all that much, whereas you're saying that damage caused by weather destroys wealth. They're different and you're both correct. I'm sure he'd love to get into why GDP really is nonsense anyway but sometimes you can only slay one beast at a time.

FreeMktFisherMN's picture

GDP is indeed a farce as value is subjective, and obviously just look at how GDP can be goosed via spending with debt and how it is divided by an underreported measure of rising prices in the CPI scam. 

The proper point is that adverse conditions are not beneficial to the economy, and that it just needs to be reiterated that the weather was not the only thing in the economy's way last winter, despite how rough a winter it was. It's similar to pointing out how drought leads to beef prices rising, and blaming that instead of also pointing out how beef is paid for with FRNs whose supply is growing exponentially. 

FreeMktFisherMN's picture

I think Austrians are just emphasizing that the economy is weak anyway and the weather as an excuse is just a cover. It was a rough winter and of course that hurts economic activity, but the economy was already weak. It was a convenient excuse. 

rustybenelli's picture

The Canadian economy grew 1.2% q1 2014. Funny,it must have been colder south of the border.

chistletoe's picture

don't you know that we have caused greenhouse gasses to change the climate?  don't you know we have frightening new weather patterns (like no hurricanes AT ALL on the east coast????  and measurable, documented sea level rises of well over 2 milligrams per year?????)


so there is no way that we could have (another) record cold winter ....

gordoha's picture

This is a pretty shitty analysis.  Anyone who has ever worked in any sort of construction or manual labor knows that the workers are in fact sent home to do nothing.

AdvancingTime's picture

 We should understand that demand drives investment. Confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and QE that distorts the markets. Money spent to replace things destroyrd by time or mother nature should be viewed as defensive rather than spending that moves us forwaed.

 We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. More on the kind of growth we need in the article below.