Extreme Weather Could Chill the Economy
Business + Economy

Extreme Weather Could Chill the Economy

REUTERS/Hazir Reka

Unrelenting harsh winter weather is likely to show up as a slight drag on economic growth in the first quarter, even if there is a spring rebound.

The number and intensity of winter storms have stalled pockets of economic activity across the country, with another system dumping freezing rain on top of snow along the East Coast on Wednesday. Ice paralyzed Atlanta late last month, bitter cold shut Chicago schools and snowstorms in the East halted travel. Add drought conditions in the West, and economists are attempting to determine how much they should deduct from first-quarter growth simply because of the weather.

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"We already saw it in auto sales," said Diane Swonk, chief economist at Mesirow Financial. "It literally freezes the economic activity, and you don't get the activity to resume until we get a thaw."

Disruption to air travel alone has been massive. According to FlightAware, 39,000 flights were canceled last month, the most since 21,000 in October 2012, when Hurricane Sandy pummeled the East Coast. Just Wednesday, there were already 3,300 flights cancelled by mid-morning, with many of them in New York, New Jersey, Chicago and Boston.

Those businesses most likely to blame weather for poor results don't get much sympathy on Wall Street, but they now won't be alone. The weather is expected to have been severe enough to affect activity across the broader economy. Kraft Foods Wednesday temporarily closed the second biggest wheat flour mill in the U.S., when travel on the roads near its Toledo, Ohio facility was restricted due to heavy snow.

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Weather has been cited as a factor behind a series of squishy economic reports, including December's surprisingly weak jobs number and the ISM manufacturing survey this week. Weather was also mentioned as a factor in the ISM service survey report, but that showed improvement and was actually better than expected.

"It adds insult to injury for retailers and restaurants," Swonk said. "We also had schools closed, so people were out of work there. It's a question mark how much will show up in the payroll numbers. January is already a bad month ... but the weather is going to affect hours worked and it should also affect the number of people that could get to work."

The January jobs report is expected to show 185,000 nonfarm payrolls added last month, up from an anemic 74,000 in December. Economists say the number may have escaped some weather impact because the survey for the report was conducted during a week of milder weather in January. 

The ISM services survey also showed improvement in the employment component. The 56.4 jobs index was the highest since November 2010. ADP's private sector jobs survey showed 175,000 jobs created in January, but manufacturing lost 12,000 jobs—consistent with the ISM survey.

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Some activity, such as business travel, will not be recovered, but Swonk predicted that some of the losses in leisure activity will be compensated for by travel to warm destinations. "My guess is that spring break will be people taking lots of sunny vacations," she said. The extreme weather "is really shifting economic activity around," Swonk added. "We tend to recoup, but not in the same places."

Stocks initially jumped, but then shrugged off the better ISM services report Wednesday. The market was hypersensitive to weakness in the manufacturing survey Monday, when the Dow lost more than 300 points.

"The price action is telling you that these markets can deal with tapering as long as U.S. growth is picking up, but if the Fed is tapering at the same time U.S. growth is slowing down, that becomes a problem for markets," said David Woo, head of global rates and currency research at Bank of America Merrill Lynch.

Fourth-quarter growth was a strong 3.2 percent, but most economists expect to see a slower first quarter. Data have "been weighed down by the weather," Woo said. "What worries me is [that the first-quarter] GDP growth is correlated more to the weather than the fourth quarter."

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For instance, he found that based on a study of 10 years of activity, retail sales are correlated more to cold weather in February than in December—possibly a negative indicator for first-quarter consumer spending. Woo also found that cold weather in December is more correlated than other winter months to weaker jobs growth, which may bode better for the January employment report. This year's winter weather is the worst since 1988.

He expects the weather to continue to be reflected in economic reports, and therefore markets, but said there should be a strong rebound in economic activity in the spring.

Though it's still difficult to quantify weather effects, first-quarter GDP growth could be impacted by about half a percent, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. Weather has a mixed impact on GDP, and he still expects to see first-quarter growth of 3 percent.

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"Our spending on utilities would be stronger, and that would be adding to consumer spending," he said. "That's one thing that argues against the slowdown. … But I think net-net, consumer spending on goods ... in shops and malls, the slowdown there is going to trump whatever extra spending consumers do to heat their homes this winter. We haven't seen it for a while, but weather can provide a pretty significant headwind for GDP growth."

Citigroup economists cut their forecast last week for first-quarter growth to between 1.5 percent and 2 percent from 2.4 percent, partly because of weather, according to Robert DiClemente, Citigroup's chief U.S. economist. "The good news is it's winter and it's always winter this time of year," he said. "You don't do a lot of housing activity. Everything shifts down. It's a question of is it normal? … This has been extreme in every way. It's been incredibly erratic."

Economists say winter economic reports are seasonally adjusted to account for bad weather, so there should be some consideration for weather impact, but not this much. March is the wild card, DiClemente said, as economic activity could jump if the disruptive weather stops and that month is milder.

"The seasonals anticipate normal weather," he said. "My favorite is March ... a month that doesn't belong to winter or spring. And March by its nature is the most volatile month. It could be this ... is the year we get a gangbuster jobs number because it would be the cleanup from the bogus winter effect."

This was supposed to be a better year for reading the economic tea leaves. "This was the year of no more excuses, no more fiscal drag, no more fiscal headwind," DiClemente said. "We were finally going to see the economy on its own, and along comes this absolutely bizarre winter. I'm hoping we can revise [GDP] up again."

This article originally appeared in CBNC.

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