Even before the U.S. was set to release its first reading of U.S. economic growth Wednesday morning, analysts were already dismissing its significance.
“Forget the first quarter,” Irwin Kellner, a MarketWatch chief economist, wrote in an opinion piece.
“Ignore the first quarter,” Nariman Behravesh, chief economist at IHS Inc., told a conference in Houston.
“All weather,” Behravesh said.
To be sure, the weather in some parts of the country between January and March was really bad. Boston got crushed by snow. So did Chicago. In the Northeast, this was the coldest winter in 30 years.
But the tie between weather and economic performance is often overstated, according to the small number of experts who’ve searched for a correlation. In fact, the data shows that only a few slices of the economy — manufacturing and construction, namely — can be hurt by a brutal winter. Retail sales, to a much lesser extent, can also feel a pinch. But weather alone won’t bring a humming economy to a halt.
If you look for trends between national weather and economic performance, you’ll find a lot of noise. In the coldest January-March period of the last 30 years (1985), the gross domestic product in the same time went up by 4.0 percent. In the snowiest period (1998), growth was 4.0 as well. In the least snowy quarter (1988), GDP grew by 2.3 percent. In the second least-snowy quarter (2009), the GDP shrank by 5.4 percent.
In a paper released recently by the Federal Reserve Bank of Chicago, two researchers concluded that the effect of weather “is not very large.” The effect, they added, is certainly not large enough to explain what happened a year ago, when a 2.2 percent contraction in the quarter lasting from January through March coincided with a particularly brutal winter.
Yes, remember that winter? It was actually a lot like this one. An Artic cold front froze much of the country, cancelling flights, closing schools and leading to a series of record lows. Initially, analysts were careful about drawing a connection to the economy; the slowdown was “in part” related to weather, the Federal Reserve said. But as the months passed, and the U.S. economy rebounded during the spring and summer, the narrative changed. It became “folk wisdom” that the winter storms led almost directly to the contraction, the Chicago Fed researchers wrote.
Attributing an economic slowdown to weather can be enticing. Some shoppers undoubtedly stay indoors when the temperatures drop. Construction projects are put on hold. If the weather gets really troublesome, supply chains can be interrupted.
Still, there are many complicating factors, particularly when it comes to the GDP, which measures economic output. If temperatures are low one week, shoppers might be even likelier to head out the next. While some projects are put on hold, the utility industry — whose rates go up — contribute more to growth.
One of the best attempts at measuring the impact of weather comes from St. Louis-based Macroeconomic Advisers, a research and forecasting firm. The group has found a modest link between economic performance and higher-than-normal snowfall in areas with greater population.
GDP is tugged in all directions by a litany of factors: government spending, tax policy, trade, and consumer confidence, just to name a few. Snowfall amounts to one more factor, Macroeconomic Advisors senior economist Ben Herzon said.
“The correlation might not be very high,” Herzon said, “But we can still estimate pretty accurately the contribution.”
In 2014, Macroeconomic Advisers estimated weather reduced the first quarter GDP growth (in annualized terms) by 1.4 percentage points. The government reported a 2.9 percent contraction in that quarter, so the economy would have gotten smaller with or without the contraction.
For the first quarter of 2015, the firm says weather will trim 0.8 percentage points from the annualized growth. In the end, pent-up demand will even out, adding 0.8 extra percentage points to growth in the second quarter.