Blaming the weather seems like a weak excuse for poor performance. Yet, that is what many economists have been doing lately, as they try to explain a slew of weaker–than–expected reports about the U.S. economy.
U.S. economic data has been coming in soft since the start of the year, and a measure of how well economic data is performing relative to forecasts recently hit its lowest level since last summer. Most economists seem to be attributing the soft patch to the lingering effects of the Polar Vortex, a weather pattern responsible for frigid temperatures and unusually heavy snow throughout much of the United States.
Many investors trying to gauge the state of the economy, however, are wondering: How much of the blame really lies with the weather? My take: While the weather is certainly responsible for some, or perhaps even most, of the recent slowdown, it’s not the whole story.
There is little doubt that brutally cold temperatures and snowstorms are impacting the economy, particularly manufacturing and housing–related activity. Common sense suggests that certain activities – particularly anything done outside – are simply harder to do when dealing with sub–zero temperatures and shoulder–high snowdrifts.
In fact, much of the recent softness in manufacturing and industrial production appears weather related. For example, the ISM New Orders Index plunged by approximately 12 points in January. The only other time in recent memory that this indicator fell that much was in October of 2001. Given that there has been no exogenous shock recently on par with 9/11, it seems that weather is having some impact, a conclusion reinforced by January’s sharp drops in industrial production and capacity utilization.