Extreme winter weather probably weakened its grip on the U.S. labor market in January only to send retail sales into a deep freeze, according to Bank of America Corp.’s David Woo.
The correlation between deviations from average monthly temperatures and changes in payrolls from their three-month average is 0.42 for last month and 0.29 in February compared with 0.72 in December, Woo, head of global rates and currencies at Bank of America Merrill Lynch in New York, said in a research note. A correlation of 1 means the two move in lockstep, while zero means there is no relationship at all.
The opposite is true for retail sales. While their correlation with temperatures is just 0.16 in December, that strengthens to 0.27 and 0.41 in the following two months, according to Woo. That’s because shoppers no longer faced with having to meet a holiday-gift deadline retreat indoors, he said.
“Retail sales are what worry me,” Woo said in an interview. “Two-thirds of the economy is based on consumption. If indeed retail sales are going to be weighed down by the cold weather in January and February, you could argue this is going to have a negative impact on growth” in the first quarter.
The outlook for payrolls is brighter. While employment in December rose by 74,000 workers, the smallest gain since January 2011 and less than the lowest forecast of any economist surveyed by Bloomberg, January could bring an improvement, Woo said. Economists at Bank of America project an increase of 185,000 ahead of the Labor Department’s report on Feb. 7.
“For non-farm payrolls in January, the survey week was extremely warm,” Woo said. ‘It’s possible this number could surprise to the upside.’’ ’
Commodity Weather Group LLC in Bethesda, Maryland, said January was the coldest first month of the year in the contiguous U.S. since 1994, in terms of natural gas-weighted heating degree days, a measure of energy demand.
Warmer-than-normal weather during the employment report’s survey week, despite frigid temperatures for the month overall, will help boost payrolls, agreed Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.
“Given our estimate that the cold weather in the December survey week depressed the seasonally adjusted level of payrolls last month by about 50,000, this implies a positive weather impact on the payroll change of about 50,000,” Hatzius wrote in a Jan. 31 note. “It is also possible that the December reading will be revised up.”
Employers probably added 184,000 workers to payrolls in January, according to the median of 88 economists surveyed by Bloomberg. The unemployment rate was unchanged at 6.7 percent, they project.
There is less likelihood of a rebound in retail sales.
“Christmas shoppers, to the extent their shopping is very time sensitive, they’re less likely to be deterred by the weather” in December, Woo said. That may help explain how consumer spending in the U.S. rose 0.4 percent that month even as incomes stagnated and job growth slowed.