This page has been archived and commenting is disabled.

Goldman's Meteoronomists Have A Dire Forecast: "Winter Is Coming"

Tyler Durden's picture




 

What little credibility the shamanistic voodoo religion that is economics had, it lost over the past 2 years when even the most modest downtick in economic activity was blamed on the "weather." It appears that as part of their conversion from "economist" to pure-play weathermen, nobody advised Wall Street's if not best and brightest, then certainly dumbest Keynesians, that adjusting for the seasons, is precisely what seasonal adjustments are for, and why they spend hundreds of hours goalseeking every data point with Arima-X-13 models until they get the result they want.

It was not enough, and in the winter of 2013 and 2014, the farce was indeed complete, when none other than the Bureau of Weather Economic "Analysis" incorporated double seasonal adjustments, to smoothe away what to most was an "inexplicable" slowdown in the US economy, and which was simply a function of two consecutive credit crises hitting China in the latter part of 2013 and 2014.

However, instead of modeling how two consecutive years of China's slowing credit impulse slammed US growth, the economisseds instead decided to blame it all on the unprecedented events of cold and snow in the winter as they relied on their favorite forecasting tool...

 

So with the winter of 2015 so far shaping up to be what some have dubbed "abnormally hot", we thought that at least this year the weatherconomists would keep their mouth shut: after all, if you blame cold weather for an underperforming economy, you better say nothing at all if the weather is warmer than usual as it has been in October and November.

Alas, it was not meant to be, and so, without further ado, here are everyone favorite economweathermen from Goldman Sachs, warning everyone that, drumroll, yes, Winter Is Coming.

No really, that's the title.

Here is the full 2000-word "explanation" from Goldman's team of merry weathermen:

Winter is Coming

  • Growth decelerated sharply in Q1 in 2014 and 2015, and we suspect that unusually harsh winter weather contributed. With the winter season now upon us, we revisit old lessons learned and develop new rules of thumb for estimating the economic impact of weather fluctuations.
  • We focus on two weather indicators that measure temperature and snowfall. The first is the deviation of “heating degree days” (HDD), a measure of cold temperatures, from seasonal norms. The second is the Regional Snowfall Index, a measure of the societal impact of snowfall that includes scores for hundreds of major snowstorms.
  • We draw three sets of conclusions about the impact of weather on the economy. First, we find that both temperatures and snowfall matter for growth. In particular, we estimate that a 1 standard deviation (SD) increase in HDD is associated with a 0.4 percentage point (pp) reduction in GDP growth and a 0.1pp reduction in our current activity indicator (CAI), while a 1SD snowstorm is associated with about a 0.3pp reduction in both. Admittedly, there is considerable uncertainty around our estimates due to both collinearity between temperatures and snowstorms and the limited sample size at the aggregate level.
  • Second, we find that weather effects have a “tell” in the form of an uneven pattern of impact across the economy. Comparing the effect of weather variables across top-tier indicators, across sectors in the Gross State Product data, and across industries in the payrolls report, we find that weather typically has the largest impact on construction, retail trade, leisure and hospitality, foreign trade, and manufacturing.
  • Third, we find that weather variables have an important but somewhat more nuanced effect on the payrolls report during the winter months. Using state-level data, we find that the intra-month pattern of weather conditions is important, with conditions during the reference week carrying the greatest weight. We estimate that a 1SD colder month and 1SD of snowfall during the reference week are each associated with a roughly 35k reduction in payroll growth.

The sharp deceleration of Q1 GDP growth in both 2014 and 2015 has provoked some anxiety about what to expect this winter. At the time, both we and Fed officials pointed to unusually severe winter weather as one contributor to the first-quarter slowdowns. To some skeptical investors, economists who attributed weak Q1 growth to weather effects sounded a bit like Peter Sellers’ Chance the Gardener promising that “there will be growth in the spring.” But in both years, growth did rebound strongly in Q2, suggesting that weather effects had in fact contributed to the weak Q1 performance. While we certainly do not claim to be able to predict this winter’s weather, we can estimate the impact of weather deviations from seasonal norms once they occur. In this week’s Analyst, we revisit some old lessons learned and develop some new rules of thumb for assessing the impact of weather conditions on growth and employment.

Why Weather Matters

Most economic data are seasonally adjusted to account for weather patterns as well as other calendar effects such as holidays. But weather can still affect economic data when it departs significantly from seasonal norms. For indicators such as housing starts normal seasonal fluctuations are very large and mostly weather-driven, meaning that even moderate deviations from normal seasonal weather patterns can have large effects not captured by seasonal adjustment.

We focus on two weather variables that capture temperature and snowfall. We measure temperature effects using the deviation of the number of heating degree days from a trailing 10-year average. Heating degree days (HDD) are a measure of cold temperatures that we have found in past research help to predict a range of economic data. We use both state-level and national population-weighted series constructed by the National Oceanic and Atmosphere Administration (NOAA). We measure snowstorms using the Regional Snowfall Index (RSI), a measure designed to capture the societal impact of major snowstorms. The RSI provides dates and scores for over 600 storms since 1900 across six regions of the US, and we construct a monthly national index—shown in Exhibit 2—by aggregating the regional indices using relative population weights. We also convert the regional series into state series by assuming that the impact of a given storm is equal across all states in a region.

Weather and Growth

We start by estimating the growth effects of weather deviations. Exhibit 3 shows suggestive evidence that at least in the most severe deviations from normal weather patterns—in this case, the 25 months with the greatest snowfall since 1972—our current activity indicator (CAI) has dipped by a bit more than 0.5pp during the month of the storm before rebounding the next month. The average dip in the 25 coldest months as measured by HDD (nine of which also had top-25 snowfall) is more modest at about 0.25pp.

We next use simple models to estimate the impact of the weather variables on both quarterly GDP growth and the CAI. Using data since 1985, we regress each growth variable on its own lag as well as both contemporaneous and lagged weather variables. We impose on the models the constraint that the coefficients on the several HDD and snowfall variables, respectively, must sum to zero, so that there is no permanent effect of weather fluctuations on the level of output. Exhibit 4 shows the resulting estimates.

The models imply that a 1 standard deviation increase in HDD relative to the trailing 10-year average (calculated as the standard deviation among only cold-weather months, equal to roughly 150 in a quarter in the case of GDP or 70 in a month in the case of the CAI) is associated with a 0.4pp reduction in GDP growth and a 0.1pp reduction in the CAI. The models also imply that 1 standard deviation of additional snowfall subtracts about 0.3pp from both the CAI and GDP growth. Our top-down finding of a smaller impact on the CAI is in line with our previous bottom-up analysis of weather effects on the CAI and is also consistent with the more modest deceleration of the CAI seen over the last two winters.

We caution that that there is considerable uncertainty around our estimates. In particular, collinearity between temperatures and snowstorms and the limited sample size at the aggregate level, especially for GDP, mean that the results are sensitive to model specification. That said, the models imply that snow and temperature deviations combined subtracted about 0.8pp from GDP growth in both 2014Q1 and 2015Q1, and we think they provide reasonable rules of thumb for the growth impact of weather fluctuations.

The Weather “Tell”

Investors are sometimes skeptical of alleged weather effects on the economy, viewing them as simply excuses to explain away weak data. How can we be confident that we are seeing the effect of weather conditions as opposed to weak growth caused by other factors?

While it is impossible to be certain, weather effects have a “tell” in the form of an uneven pattern of impact across sectors of the economy. Exhibit 5 shows our estimates of the impact of temperatures and snowfall on a number of top-tier indicators. We find that weather tends to have the largest impact on economic data related to housing and construction, retail spending, and trade. We also assess the relative impact on different sectors of the economy using state-level panel data on Gross State Product by sector, available quarterly since 2005. We find that the most weather-sensitive sectors include construction, mining, manufacturing, retail trade, and accommodation.

Finally, we can also look at the cross-sectional or category-level data within a particular report for typical weather patterns. For example, we have shown in past research that the impact of harsh winter weather differs across categories of retail sales, with the largest effects on building materials, vehicle sales, and furniture, and a positive impact on non-store sales, which include online purchases.

Weather and the Payrolls Report

We conclude by assessing the impact of weather conditions on payrolls. The impact of weather on the employment report is more nuanced because the precise timing of the payrolls reference week is important. We construct a state panel that includes payrolls and weekly HDD, recording for each month the degree days deviation during the reference week and the three previous weeks. We include all weekly variables for both the current and prior month in an initial regression in order to estimate the optimal relative weighting of the weekly weather observations. We find that the reference week is about twice as important as any other week, and we use the regression coefficients—shown in Exhibit 6—to calculate optimally-weighted HDD summary variables for the current and prior months.

We next add other weather data to our panel to see if those series are important too. We find that while the snowfall variable again has an economically and statistically significant impact, a parallel temperature measure called cooling degree days does not. We also find that the effect of precipitation is statistically significant, but quite small.

The richness of the state-level payrolls data enables us to address several more subtle questions that are difficult to answer convincingly with aggregate national time series:

  1. Do weather effects matter year-round? We find that the effect of HDD deviations is not statistically significant in single-month samples from June to October.
  2. Is the impact asymmetric between warmer-than-usual and colder-than-usual months? By splitting the sample, we find that the per-degree day impact of colder deviations is about double that of warmer deviations.
  3. Is the effect linear? We find that a quadratic degree days term is not statistically significant. While there are an endless number of ways one could specify thresholds, we think that assuming linear effects is reasonable.
  4. Do weather effects reverse? In unconstrained regressions, the coefficients on the contemporaneous and two lagged weather terms usually sum to roughly zero, suggesting that a nearly full rebound usually occurs within a couple of months.

While these conclusions do not necessarily apply to all economic indicators, we think they offer valuable broader lessons. Based on these findings, we construct both aggregate and industry-level models using the optimally-weighted HDD deviation and a version of the snowstorm index adjusted for the timing of the payrolls reference week. Exhibit 7 summarizes the model estimates.

In aggregating industry effects to produce a bottom-up estimate of the total impact, we only include industries whose temperature or snowstorm effects are statistically significant. We find that a 1 standard deviation colder month (about 70 HDD) is associated with a roughly 35k reduction in payroll growth, while 1 standard deviation of snowfall during the reference week is associated with a reduction of 25-45k. Once again, the weather impact leaves a familiar pattern, weighing primarily on employment in construction, leisure & hospitality, and retail & wholesale trade.

Slightly more favorable temperatures in the weeks leading into the November reference period should make a small positive contribution to payrolls this month. The employment components of business surveys have been mixed so far, and the labor differential included in the consumer confidence report declined. We therefore expect a gain of 200k in November, a bit softer than the 215k average gain over the last six months.

* * *

Yes, Goldman really spent a few days writing this.

And after that nearly 2000 words of worthless drivel, here is the punchline: if poor Q1 in 2014 and 2015 was blamed on the cold weather, then how many points of GDP in Q1 2016 (and Q4 2015) will be the result of abnormally warm weather (just don't ask the retailers who blame both hot and cold weather when their sales keep on declining) and will this be the first case in monetary policy history when a Fed hiked rates because it thought the economy was improving only to realize after the fact that it was merely ignoring the weather effect it had dissected so extensively in the prior two years, simply because this time it was in reverse and had been "boosting" the economy?

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 11/27/2015 - 17:03 | 6847219 EscapeKey
EscapeKey's picture

blame it on the boogie

Fri, 11/27/2015 - 17:04 | 6847223 Truther
Truther's picture

Yellen with a fur coat. What a bitch.

Fri, 11/27/2015 - 17:16 | 6847273 Francis Marx
Francis Marx's picture

Thats not a fur coat, thats a skinned out hairy serf..

Fri, 11/27/2015 - 17:34 | 6847338 knukles
knukles's picture

Equity asset manager's rules.
1.)  You cannot predict Interest Rates (Be a bond manager and listen to that 24/7/365 and if rates go up, why'd you lose money and go down, you didn't make enough)
2.)  But you can predict P/E's   (Which in largest part are function of discount a la interest rates, which you ((THEY said)) cannot be predicted)
3.)  But you can predict the weather if Goldman says so..   Assholes..
                                It's an excuse for "just a brief respite" (temporary, transitory) in the forecasted increase in earnings from real organic economic growth that ain't there!

 

                                                           PS:  Is Janet saying "What, me worry?"

Fri, 11/27/2015 - 19:37 | 6847754 CrazyCooter
CrazyCooter's picture

Is it just me, or does she have W's nose?

Regards,

Cooter

Fri, 11/27/2015 - 23:30 | 6848478 tc06rtw
tc06rtw's picture

   
 In 2010,  The Dem’s  big mistake was not passing legislation outlawing Winter.

Sat, 11/28/2015 - 07:08 | 6848956 Scooby Dooby Doo
Scooby Dooby Doo's picture

Goldman Goldman Goldman Goldman Goldman Goldman Goldman Goldman Goldman Goldman Goldman Goldman.

Sat, 11/28/2015 - 07:09 | 6848957 Scooby Dooby Doo
Scooby Dooby Doo's picture

Sachs.

Fri, 11/27/2015 - 17:34 | 6847352 OldPhart
OldPhart's picture

Check it out, Bank Whistle Blower sentenced to jail for whistle blowing...

http://www.theguardian.com/news/2015/nov/27/hsbc-whistleblower-jailed-five-years-herve-falciani

 

Fri, 11/27/2015 - 17:44 | 6847393 yogibear
yogibear's picture

Yellen is a result of  an early  GMO experiment.

Fri, 11/27/2015 - 20:05 | 6847839 messymerry
messymerry's picture

They discontinued it because it stunted growth,,,

;-D   

Edit:  Who's the little prickolini that downvoted every post????

Fri, 11/27/2015 - 17:46 | 6847402 SILVERGEDDON
SILVERGEDDON's picture

Kill it with fire.

It's the only way to be sure.

Fri, 11/27/2015 - 17:18 | 6847280 o r c k
o r c k's picture

blame it on the Bossanova--with it's majic spell.

Fri, 11/27/2015 - 17:26 | 6847309 Noplebian
Noplebian's picture

Just pedalling fiat fakeness and enslavement, so why do people hang on to their every word?

Maybe this sums it all up......

http://beforeitsnews.com/global-unrest/2015/11/black-friday-madness-this...

 

Fri, 11/27/2015 - 20:53 | 6847690 Fredo Corleone
Fredo Corleone's picture

Nemo saltat sobrius.

Fri, 11/27/2015 - 17:06 | 6847226 Truther
Truther's picture

Blame it instead on Geo-engineering and HAARP. The fucking morons never let up.

Fri, 11/27/2015 - 19:41 | 6847773 silverer
Sat, 11/28/2015 - 07:16 | 6848963 Scooby Dooby Doo
Scooby Dooby Doo's picture

You two are correct. So many people are getting sick always thought it was in their mind. I’ve never been sick on a heavy spray days but Friday night the 22nd and all day Saturday, balance was horrific I was all over the place, stepping left or right total loss of control. This has never happen to me before. I’m late middle age but I exercise regularly and was very athletic my entire life. Friday night I was very worried, I sincerely thought it might be my time. Acting like drunk a feeling of very drunk, I’m a rational person but It had to be from a all day outside clean up. As Sunday came I felt much better ands still do. This spraying crap won’t end its a death nail. Tic tac toe spray patterns all day in the sky?

Fri, 11/27/2015 - 17:09 | 6847239 Truther
Truther's picture

I wouldn't believe SHIT coming out of the Commie Goldman's Zionist Pricks. 'Nuff said.

Fri, 11/27/2015 - 17:09 | 6847241 i_call_you_my_base
i_call_you_my_base's picture

Even if true, it doesn't matter, since the only thing that matters is CBs.

Fri, 11/27/2015 - 17:09 | 6847243 rejected
rejected's picture

Oh yea,,, guaranteed to be the warmest winter yet, to be followed by the warmest summer, followed by the .... ad nauseum

Fri, 11/27/2015 - 17:09 | 6847246 moneylover3
moneylover3's picture
"Winter Is Coming"

==========

Nuclear Winter?!

Fri, 11/27/2015 - 17:11 | 6847249 Truther
Truther's picture

Possibly. Those Russian and Chinese ICBMs are quite potent.

Fri, 11/27/2015 - 17:28 | 6847320 1stepcloser
1stepcloser's picture

Market will jump on an ICBM launch.  Rate hikes are on the back burner forsure!

Fri, 11/27/2015 - 18:31 | 6847554 Itsthetiming
Itsthetiming's picture

Only in your fantasy I am afraid.

Fri, 11/27/2015 - 17:17 | 6847277 RawPawg
RawPawg's picture

Bo Knows Blaming

 

Fri, 11/27/2015 - 17:33 | 6847314 Itchy and Scratchy
Itchy and Scratchy's picture

Dang it! I listened to our pal 'Al' (Nobel) Gore and he convinced me to sell my snow blower, shovels, winter boots and snow tires! And what in the heck am I gonna do with this extra case of sunscreen? D'oh! 

Fri, 11/27/2015 - 17:31 | 6847336 Skeeterworborton
Skeeterworborton's picture

What is this new "winter" thing they speak of....first seen in 2014....will it happen again?

Fri, 11/27/2015 - 18:30 | 6847548 Itsthetiming
Itsthetiming's picture

El Niño cycle. It's natural.

Climates change also naturally. Earth has never had static weather patterns that we know of.

Fri, 11/27/2015 - 17:34 | 6847354 Catullus
Catullus's picture

I got my winter is coming email on Wednesday. El Niño year. If it's mild enough this winter, natural gas burns aren't high. We could see no storage capacity by fall 2016. Then you're talking burn offs or producing well shutdowns. And then the wave of defaults from the gas production industry.

I don't know if I believe it. But that power and energy industry at least have some meaningful correlation to weather.

Fri, 11/27/2015 - 17:41 | 6847376 buzzsaw99
buzzsaw99's picture

Goldie = Pack of assholes.

Fri, 11/27/2015 - 17:42 | 6847383 Itchy and Scratchy
Itchy and Scratchy's picture

Uber wealthy Pack of A-Holes to you Sir! 

Sat, 11/28/2015 - 07:21 | 6848967 Scooby Dooby Doo
Scooby Dooby Doo's picture

HVT to the LW's. This is your call to arms.

Interficiet huc praeiudicati.

Fri, 11/27/2015 - 17:42 | 6847384 Chia-Pet
Chia-Pet's picture

Summer is coming... after winter and spring.

Fri, 11/27/2015 - 17:43 | 6847392 Itchy and Scratchy
Itchy and Scratchy's picture

So what yur tryin' to tell me is ....'climate change is real!' I no longer doubt! How much carbon tax do I owe?

Fri, 11/27/2015 - 17:48 | 6847411 Who was that ma...
Who was that masked man's picture

Blame the WHETHER.

(You're gonna get screwed WHETHER you like it or not).

Fri, 11/27/2015 - 17:49 | 6847417 newnormaleconomics
newnormaleconomics's picture

Real GDP per capita has decelerated to an average rate of near 0% since 2007-08. Therefore, the post-2007 trend rate is within the margin of error of the estimates of the deflator, inventories, and import prices, implying that the BEA, BLS, and Commerce have sufficient discretion to "manage" these data to avoid reporting successive quarters of negative real GDP SAAR. 

With reported earnings and revenues and NIPA profits after tax contracting YoY, the obvious recessionary signals must be responded to with urgency in order to "manage" the GDP data to avoid reporting "stall speed" and recessionary conditions. 

Thus, expect to see the deflator be held relatively constant while the data for inventories, import prices, and probably payrolls are "managed" increasingly to go along with Auntie Janet's "forward giddiness". 

This is likely to be part of the new normal of secular stagnation for the hyper-financialized, rentier-socialist corporate-state hereafter. 

We're all rentier-socialists now, comrades, only the bottom 90-99% of us do not have sufficient capital to be rentiers, meaning that the rest of us are merely corporate-state socialists proles without the benefit of rentier income.  

 

Fri, 11/27/2015 - 18:33 | 6847561 Itsthetiming
Itsthetiming's picture

I'm sorry is there any actual prediction with that pile of garbage you just threw up?

Fri, 11/27/2015 - 17:55 | 6847437 Itchy and Scratchy
Itchy and Scratchy's picture

My dream of golfing in January in Michigan has now vanished! :(

Fri, 11/27/2015 - 17:54 | 6847439 Itsthetiming
Itsthetiming's picture

What's the point of this long and boring article that throws out volumes of data with no actual conclusions?

Fri, 11/27/2015 - 18:13 | 6847501 Itchy and Scratchy
Itchy and Scratchy's picture

One day we will look at headlines like this and shake our heads at the climate change ideocity that so many of the sheeple accepted and believed!! 

Fri, 11/27/2015 - 18:28 | 6847542 Itsthetiming
Itsthetiming's picture

If CFCs hadn't been outlawed when they were and allowed to continue, where we would be today would resemble a holocaust scene.

And that's not an exaggeration.

Fri, 11/27/2015 - 18:15 | 6847507 Neochrome
Neochrome's picture

I find it useful, could use updates when my lunch time is coming as well...

Fri, 11/27/2015 - 18:26 | 6847535 Itsthetiming
Itsthetiming's picture

Anyone who argues against the claim we are changing the climate hasn't studied it very well.

That's just a fact.

In relation to the specific sub-section of climate change relating to temperature, long term and short term consequences are very good and very bad depending where you live.

But really this just relates to human activity, animals and fauna tend to move with changes whereas humans can not primarily due to the numbers of people that would be required to fit into a relatively small geological area.

The reliance upon energy increases rapidly the more you are in an area that is moving further away from the median temperatures required for relatively minor energy use.

Fri, 11/27/2015 - 19:16 | 6847686 mijev
mijev's picture

"Anyone who argues against the claim we are changing the climate hasn't studied it very well. That's just a fact."

Please provide a link to what you consider to be the quintessential set of "facts" that you think back up that assertion. I've studied the climate pretty well over the last 45 years and I'd be interested to see.

Fri, 11/27/2015 - 19:39 | 6847761 silverer
silverer's picture

You must have found that website.  Of course we are changing the climate.  On purpose.  Better write your congressional representative. 

http://usawatchdog.com/uncovered-government-docs-prove-chemtrails-real-d...

.

 

Sat, 11/28/2015 - 03:10 | 6848791 Sanity Bear
Sanity Bear's picture

I also trust the Fed's temperature inflation numbers.

Fri, 11/27/2015 - 19:02 | 6847637 christiangustafson
christiangustafson's picture

Kondratiev

Long credit cycle, bitchez!

Fri, 11/27/2015 - 19:07 | 6847648 stant
stant's picture

If he was alive today Obama would have him droned. Stalin got him first

Fri, 11/27/2015 - 19:36 | 6847748 silverer
silverer's picture

Because of the weather, I'm not going to spend any money until May.  Thanks.

Fri, 11/27/2015 - 20:01 | 6847833 803Mastiff
803Mastiff's picture

What is the forcast if the rock is gone and replaced with a counterfeit rock of the same density.

Sat, 11/28/2015 - 02:45 | 6848775 Yen Cross
Yen Cross's picture

  Tyler? ...You really need to do something about the " unknown junker"?

 On an lighter note, those 'standard deviation comments relative to', exhibits numbers 3-5 are interesting.

 Bar Graphs, to prove weather patterns. lol

 I wonder if Al Gore used those charts to proxy his carbon credits?

Sat, 11/28/2015 - 07:28 | 6848969 Scooby Dooby Doo
Scooby Dooby Doo's picture

Get an apple. Cut it in half. Leave one half on your window sill for 10 days.
What you will see is nature working. That is, bacteria will populate the apple, and consume it.
Those that create chemtrails / modify the weather, see their FELLOW HUMANS as the bacteria, and our beautiful planet as the apple.
They believe that by reducing the number of “bacteria” by a factor of 90%, they can keep this planet for the “chosen Elites”, the joos.
Here is wisdom: Nature has been the mover and shaker of EVERYTHING since everything started. If these imbeciles believe that after a mere 200 years of “science” they can gain the upper hand over Nature they are BEYOND HELP and belong in a mental asylum.
I am in Australia we have it here, and I am ashamed that very little people are aware.
Let’s all work together to remove this cancer The NWO, The Goldman's from our future.

Sat, 11/28/2015 - 09:54 | 6849121 rsnoble
rsnoble's picture

Fucking dipshits couldn't even wait till December could they!  They've probably been itching to print this for 2-3 months now.

Sat, 11/28/2015 - 12:36 | 6849542 Skiprrrdog
Skiprrrdog's picture

Learn to swim, Bitchezzz

Do NOT follow this link or you will be banned from the site!