How does weather affect the economy?
As Hurricane Sandy bears down on the East Coast, it’s worth asking how storms impact the way we live. In years past this was a foolish question. After all, in an agricultural society unusual weather has a direct impact on food production. 1816 was the year without a summer in northern New England. Over a foot of snow fell in early June, and there was a killing frost in mid-August. That winter cattle starved for lack of hay, and people sustained themselves on boiled nettles and porcupines.
As we shifted to an industrial economy, people were less dependent on month-to-month changes in the climate. Year-round production was imposed on a summer-winter schedule, but vestiges of our agricultural heritage remain: school schedules that used to accommodate working in the fields; financial stresses that climaxed in the fall because the economy’s cash needs at harvest-time.
But as a consumer-economy, the weather still has an effect, particularly on retail sales. Usually an individual storm like Sandy just defers purchase plans—what we don’t buy this week we’ll make up next week. But when storms impact holidays (like Halloween) some of those purchases never happen. Last year’s warm winter meant that winter clothes were never purchased and planned ski vacations were just cancelled.
The National Oceanic and Atmospheric Administration sponsored research that indicated that weather events can reduce our economy output by up to $500 billion. Different states have differing levels of vulnerability. New York was seen as the most vulnerable; Tennessee the least.
But preparation helps. As we batten down the hatches and prepare for Sandy’s impact, we can be thankful that we’re ready. Because what’s really disruptive isn’t the weather, but the surprise.
Douglas R. Tengdin, CFA
Chief Investment Officer
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