Frigid Winter Spells Trouble for U.S. Economy

Photographer: Jin Lee/Bloomberg

Pedestrians walk through the snow past the New York Stock Exchange (NYSE) in New York on Jan. 3, 2014. Close

Pedestrians walk through the snow past the New York Stock Exchange (NYSE) in New York on Jan. 3, 2014.

Close
Open
Photographer: Jin Lee/Bloomberg

Pedestrians walk through the snow past the New York Stock Exchange (NYSE) in New York on Jan. 3, 2014.

Investors who want to divine the outlook for U.S. economic growth should look at the weather. David Woo’s rule: the colder, the slower.

Financial markets tend to overreact to abnormally warm or cold conditions, said Woo, head of global rates and currencies at Bank of America Corp., in a Feb 4. report. He found a 48 percent correlation between first-quarter economic growth and temperature over the past decade.

With Woo calculating January to be the coldest in the U.S. since 1988 and February set to stay chillier than usual, his growth prognosis isn’t optimistic. Much of the Northeast this week faced snowstorms and more may come this weekend.

The coldest December since 2009 already helps explain a slowdown in employment growth, said Woo. He found that over the past decade, a 1 degree Celsius (1.8 degree Fahrenheit) drop below December’s historical norm has led to that month’s non-farm payrolls coming in an average of 38,000 below forecasts.

A 1 degree Celsius drop in temperature in the first quarter is associated with an average 1.5 percentage point decrease in gross domestic product growth since 2004. One explanation is that retail sales are more sensitive to temperature in January and February than in December, when Christmas leads people to shop, he wrote.

“We are concerned that the market may struggle to see through the ill effects of the current unusually cold winter,” New York-based Woo said.

* * *

The exposure of top earners to the fallout of recessions depends on how they make their money.

A study published Jan. 22 by the Cambridge, Massachusetts-based National Bureau of Economic Research sought to discover how sensitive the top 1 percent of earners are to business cycles.

Using income histories from the U.S. Social Security Administration, they found the distribution of earnings at the very top is slightly more related to the ebb and flow of the economy than is the case for the average population.

The differences vary significantly depending on the industry. Those paid the most in finance, insurance, real estate and construction saw their earnings vary widely with the business cycle.

By contrast, high earners in services -- which account for 40 percent of individuals in the top 1 percent -- have incomes that fluctuate with the cycle less than the average.

The paper was written by Fatih Guvenen of the University of Minnesota in Minneapolis, the Social Security administration’s Jae Song and Greg Kaplan of Princeton University in New Jersey.

* * *

China hasn’t yet become a big enough economic power to influence growth in developed markets as much as the U.S. and Europe do.

A Jan. 31 study by JPMorgan Chase & Co. economists Joseph Lupton and David Hensley found a one-percentage-point slowing in Chinese gross domestic product would cut industrial-nation growth by 0.21 point over the following year.

A similar weakening in the U.S. would trim growth on a one-for-one basis, while the euro-area impact is 0.65 point.

China has more influence over emerging markets. A Chinese slowdown would damp growth in the rest of the emerging world by 0.73 point over four quarters, New York-based Hensley and Lupton said. In emerging markets and industrial economies combined, a one-point weakening by China would amount to a growth shock of 0.35 point.

* * *

Saudi Arabia, Russia and Romania have made the biggest gains since 2000 relative to other countries when the broadest measures of economies, politics and technology are considered.

An index published this week by PricewaterhouseCoopers LLC attempted to measure the relative progress of 42 economies by compiling data on economies and political situations as well as the use of mobile telecommunications.

Between 2000 and 2012, Saudi Arabia jumped 14 places in the ranking to 12th, while Russia rose by the same margin to 25th. Romania climbed 13 slots to 37th. Sweden and Switzerland topped the league, while the U.S. fell to 18th from 14th in 2000 and 2007.

* * *

While emerging markets may be slowing now, the ranks of their middle classes are rising.

Rapid-growth countries such as China, Turkey and Brazil will witness a doubling of middle-class households to 200 million by 2022 from 94 million in 2012, according to a Feb. 4 projection by Ernst & Young LLP.

In China, for example, the number of households earning more than $35,000 will triple by 2022 to almost 80 million, more than Japan.

That will increase demand for health care and education while probably leading to an enhancement of worker skills, the study said. It also suggested that as more household incomes approach $10,000, the demand for durable goods will accelerate.

Refrigerator sales in Thailand, for example, doubled over the past decade as the number of households earning more than that amount rose from 28 percent of the total to almost to almost 40 percent.

* * *

The more left-leaning Americans are politically, the more beer and spirits they consume.

A study for the Journal of Wine Economics released Jan. 29 found a direct correlation between political beliefs and the demand for alcohol, using data from between 1952 and 2010.

As states become more liberal, as measured by the voting patterns of their congressional representatives, their consumption of beer and spirits rises, said Pavel Yakovlev and Walter P. Guessford of Pittsburgh’s Duquesne University. The imbibing of wine declines.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.