Back in early February, Zero Hedge was among the first to suggest that abnormally warm temperatures and a record hot winter, were among the primary causes for various employment trackers to indicate a better than expected trendline (even as many other components of the economy were declining), in "Is It The Weather, Stupid? David Rosenberg On What "April In January" Means For Seasonal Adjustments [16]." It is rather logical: after all the market is the first to forgive companies that excuse poor performance, or economies that report a data miss due to "inclement" weather. So why should the direction of exculpation only be valid when it serves to justify underperformance? Naturally, the permabullish bias of the media and the commentariat will ignore this critical variable, and attribute "strength" to other factors, when instead all that abnormally warm weather has done is to pull demand forward - whether it is for construction and repair, for part-time jobs, or for retail (and even so retail numbers had been abysmal until the just released expectations meet). Ironically, while everyone else continues to ignore this glaringly obvious observation, it is Bank of America, who as already noted before are desperate to validate a QE as soon as possible (even if their stock has factored in not only the NEW QE, but the NEW QE HD), that expounds on the topic of the impact of record warm weather. In fact, not only that, but BofA makes sense of the fact why GDP growth continues to be in the mid 1% range while various other indicators are representative of much higher growth. The culprit? Global Warming.
Of course we jest, at least with that term, but wouldn't it be very ironic if it was truly unseasonally hot weather that was benefitting the biggest critic of greenhouse gas emissions? Unfortunately, while central banks can believe that have normalized mean reversion and the business cycle, weather always will get back to the mean with a vengeance. Which simply means that the past 3 months of strength will be "cash for clunkered" quite soon, as all the soaked up extra demand disappears in coming months.
To wit:
In one respect, we agree with the perma-bulls: the weather helps explain why Q1 GDP is weak despite solid monthly indicators (Chart 3). Our GDP model is tracking just 2.0% growth in the quarter. Yet, most of the important monthly indicators are consistent with higher GDP growth. For example, aggregate hours worked have grown at a 3.9% annual rate over the last three months. Add in a percentage point for productivity gains, and it suggests nearly 5.0% GDP growth. Why the disconnect? Blame it on the weather: GDP is hurt by lower energy consumption, while the rest of the economy (and most monthly indicators) benefit from lower energy costs and milder weather.
Full note from BAC:
Bulls, Bears and winter naps
- Review: As expected, the February data continue to come in above consensus expectations.
- Hot topic: Mild winter weather lowers energy consumption, but boosts almost every other sector of the economy.
- Preview: Housing starts are likely to increase, but we expect existing and new home sales to edge lower.
Review: A hot economy
February was a good month for the US economy (Table 1). In the past week, retail sales, jobless claims and regional manufacturing indexes confirmed the strength already reported for employment and motor vehicle sales. As we have noted before, a variety of tailwinds continue to support growth, but should fade over the course of the spring.
Hot topic: Weathering heights
This improvement in part reflects an incredibly mild winter. Average temperatures for December, January and February were the fourth highest since national data started being kept in 1890. According to the National Oceanic and Atmospheric Administration (NOAA), there have been 45 high-impact snowstorms that affected the Northeast since 1956, including five last winter, but none this winter. While the weather has small effects on the economy most of the year, weather has big economic impacts in the winter.
[17]Recently, perma-bull economists [ZH: !!!] have been pushing a revisionist view of the impact of a mild winter on the economy. They point out that warm temperatures mean less spending on energy, lowering overall consumption and GDP growth. As Chart 1 shows, there is some truth to this argument: in the past three months overall consumer spending has been flat in real terms, but excluding energy spending has grown at a 1.7% annual rate. Is a mild winter causing artificial weakness in the economy? And, as such will the spring bring even stronger
growth?
We strongly doubt it and we would turn the perma-bull argument on its head. While warm weather hurts energy consumption (and small sectors like the ski industry) mild winter weather stimulates most of the economy. What is striking about Chart 1 is how weak growth has been even outside of energy consumption. Households saved a lot on their energy bills this winter—with a fall in both price and quantity—and despite this windfall, non-energy consumption was weak. In our view, this confirms that consumers remain quite cautious.
A long winter’s nap
One way to gauge the broad impact of winter on the economy is to look at the seasonal fluctuations in employment. At the outset it is useful to net out the retail sector, which is dominated by hiring and firing for the holiday season. Obviously, this is not because winter weather makes it easier to shop, but because of the timing of Christmas. Indeed, like most sectors, unusually bad weather dampens the normal seasonal-surge in holiday shopping.
The rest of the economy tends to take a winter nap. As Chart 2 shows, the normal seasonal pattern for non-retail employment is about a 2.5% drop from October to January, followed by a sharp recovery in the spring and early summer. The biggest job losers in the winter are construction (down 12% from October to February), leisure and hospitality (down 4.2%) and mining and logging (down 4%). However, dividing the labor market into 15 major groups, every sector experiences a drop over the winter, with a typical decline of about 2%. Abstracting from the holiday blitz, even retail employment drops 2% in the October-to-February period.
While seasonal factors illustrate the powerful negative impact of normal winter weather, it is much harder to quantify the impact of unusual winter weather. The easiest sector to quantify is the housing market. Regression models suggest both warm weather and light precipitation have a statistically significant positive impact on housing starts. In particular, we found the mild winter has boosted starts by 5 to 10 pp per month, with the biggest impact in January. We also find smaller impacts for home sales, construction and motor vehicle sales.
Looking ahead, weather is not particularly important in the spring. Hence, even if the weather remains mild, as some forecasters predict, the official seasonally adjusted data will likely drop back to pre-winter levels.
Weather whiplash
[18]In one respect, we agree with the perma-bulls: the weather helps explain why Q1 GDP is weak despite solid monthly indicators (Chart 3). Our GDP model is tracking just 2.0% growth in the quarter. Yet, most of the important monthly indicators are consistent with higher GDP growth. For example, aggregate hours worked have grown at a 3.9% annual rate over the last three months. Add in a percentage point for productivity gains, and it suggests nearly 5.0% GDP growth. Why the disconnect? Blame it on the weather: GDP is hurt by lower energy consumption, while the rest of the economy (and most monthly indicators) benefit from lower energy costs and milder weather.
It is likely that the markets will get the weather story wrong on the way in and on the way out. How so? In the near term, the markets seem to be over-reacting to the better February data, seeing an improving trend rather than a temporary blip. Going forward, the markets will likely expect more of the same, only to be disappointed by a second quarter payback. We are particularly skeptical about the idea that the housing market is starting to turn in earnest.
The weather has likely played a role in pushing 10-year yields out of their recent trading range of 1.80 to 2.10% (Chart 4). Some of the low rates reflected a misguided view that the Fed would move straight from Operation Twist to QE3 even with okay growth in the economy. As our discussion above suggests, it is also likely that the markets have not factored in the weather properly.
That’s all for now, I’m headed over to Bryant Park to catch some rays.
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