Photo: Viktor Hanachek. Source: Picjumbo
For most people, this has been a pretty mild winter. Apart from the massive snowfall that hit the east coast about a month ago, there have been relatively few winter storms. A year ago, Boston was buried under over 9 feet of the white stuff. The record cold and record snowfall seemed to never end. Now, the streets are clear and home buyers are getting an early start to 2016. The number of pending sales for January is up 40% from a year ago.
So is this the jump-start to the economy that folks are looking for? Will a warm winter encourage consumer spending? Or will the lack of snow disrupt winter coat sales, ski vacations, and the hourly earnings of snowplow drivers?
This isn’t the first time this has happened. The polar-vortex winter of 2014 was preceded by one of the warmest on record in 2013. And last year’s epic snowfall was a unprecedented. Surprisingly, there’s little for economists to go on. It’s fairly unusual for winter to affect the broad economy now to any significant degree, and aggregate weather statistics tend to be area-weighted rather than population-weighted, perhaps because they have been gathered by physical scientists rather than social scientists.
A century ago, when the economy was far more dependent on agriculture, severe weather and bad crops had a measurable effect on aggregate income. Thus, the Dust Bowl had a big impact on the economy during the Great Depression. Many think that seasonal patterns in the stock market—the fact that we often have market crashes in September and October, or the January effect, or “sell in May and go away”—are related to old planting and harvest patterns. After all, farmers need credit in the spring to finance planting and equipment purchases. If the harvest is especially poor, many of those loans could go bad. The systemic failure of a huge number of Midwestern banks contributed significantly to the Great Depression. And, by the way, those banks weren’t “too big to fail.”
Source: Federal Reserve Bank of Richmond
On the other hand, the Drought of 1988 didn’t have nearly as big of an effect. Even though it cost the economy over $100 billion (in 2014 dollars), our economy had shifted away from its focus on farming, and banks were more disciplined in their lending practices. Also, programs like crop insurance, Federal Farm banks, and deposit insurance made sure that a localized event didn’t lead to systemic financial failure.
Still, any significant change in weather patterns is disruptive. Retailers who stocked up on winter clothing and sports equipment will likely have to take some losses as they pare their inventories to get ready for the spring season. And boots may not be nearly as fashionable this year. Because the economy has evolved, we’re not nearly sensitive to cold weather any more, although winter storms still keep us bundled up and hunkered down.
But the warm temperatures, lack of snow, and low oil prices mean that consumers will have a lot more cash in their pockets this spring. Let’s hope they get out and do what they do best: go shopping.
Douglas R. Tengdin, CFA
Chief Investment Officer