Home > economics profession, The Economy > Bad Economic News: Worrying About the Weather

Bad Economic News: Worrying About the Weather

from Dean Baker

After touting the economy’s strong growth over the last three months we are now seeing news reports warning that the economy is actually weaker than we thought. No doubt the double-dippers will soon emerge from underneath the bridge to warn us of the economic calamity that lies just around the corner.

The problem in this picture is that these analysts are literally worrying about the weather. The weather can have a substantial effect on the economy. Much of this effect is entirely predictable. We know that every summer tens of millions of people will take vacations and go to resort locations creating jobs in hotels, restaurants, and other vacation-related industries.

To take account of these effects we seasonally adjust our data. This way it does not look like the economy is experiencing a boom every spring as warm weather jobs start to appear and entering a recession as they disappear in the fall.

However there is also the impact of weather that is better or worse than normal. Last winter was unusually mild across the Northeast and Midwest. There were few serious snowstorms or bouts of frigid weather.

This makes a big difference for the economy because factors that would typically slow the economy were not present. Ordinarily construction sites would be closed for at least a few days in these regions because of the bad weather. Also, starts of many construction projects would be put off until the weather had warmed up.

In addition, people will be more likely to go out shopping on a relatively warm winter day than in a snowstorm or subzero weather. This means that they would be more likely to go to a mall to buy small items like shoes and clothes. They would also be more likely to shop for bigger items like a car or house. And they would be more likely to go out to restaurants for meals when the weather is good.

For these reasons the data in the winter months was better than would otherwise have been the case. However this virtually guaranteed that the data for the spring months would look worse than would otherwise be the case.

If construction workers stayed employed through the winter, then they will not be hired on as new workers in the spring. This means that we will see less growth, or possibly declines, in construction employment because fewer workers than normal lost their job in the winter. The same would apply to retail employment and restaurant employment where more workers may have been kept on because of higher than normal business in the winter months.

Insofar as the good weather led to better than normal car and house sales in the winter months, there will be a direct payback in lower-than-normal sales in the spring months. People who bought a house or car in January will not turn around and buy another one in April or May. This means that these months will be showing sales that are lower than the underlying trend.

In general, we will be seeing economic data in April and May that make the economy look weaker than it actually is, just as the data from the winter months made it look stronger. The underlying picture of the economy has not changed much over the last six months.

Ideally, economic analysts would be able to look past the gyrations in the data that are caused by the weather, but unfortunately this rarely seems to be the case. Most economists jump on the latest numbers and seem to lose sight of any context.

Many well-respected economists were raising concerns about a double-dip recession last summer based on weak data from the first half of the year. In fact, it was easy to see that this weakness was largely attributable to the winding down of the stimulus. The good part of this story was that once the stimulus had largely unwound by the middle of the year, it was no longer a drag on growth. As a result we got the uptick in growth in the second half of 2011, which then caused much undue optimism.

If we ignore the latest fluctuations for the moment, It is highly unlikely that the economy will grow less than 2.0 percent this year, nor more than 3.0 percent. According to the Congressional Budget Office the economy is currently about 6 percentage points below its potential. With potential output growing about 2.5 percent annually due to population and productivity growth, even at the top end of this range we are only closing this gap at the rate of 0.5 percentage points a year.

In other words, our current growth path implies that it will take close to a decade for the economy to get back to its potential and for the labor force to be fully employed. This is the problem that should be central in every discussion of the economy. And, we should spend less time worrying about the weather.

See article on original website

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  1. April 29, 2012 at 7:08 am | #1

    Oh dear this is underpinned by Keynsian theory and the assumption of perpetual growth.

    That everyone should be able to provide themselves and their familiy with a livelihood should go without saying. Please can we start from that principle?

  2. davetaylor1
    May 2, 2012 at 5:09 pm | #2

    Henry, I appreciate your position, but Dean’s is based on neo-Keynesian theory. Keynes was interested in real growth and wasn’t stupid enough to want or expect it to last for ever; enough that everyone had more than enough, as worked well enough even with war-time rationing.

    That everyone should be able to provide themselves and their family should go without saying, but thanks to Malthus and the later Social Darwinians and Nietzschians it doesn’t. Malthus’s argument, that feeding families is self-defeating because they simply grow until they cannot all be fed, has not been answered by selling contraception and cannot be answered by non-technical philosophers, politicians, administrators and bloggers who have no idea of how brains and information-based control systems work. This is one of the crucial issues on which RWER enthusiasts still need to do their homework.

    Nietzsche’s argument, that the destiny of Man is to evolve into Supermen, encourages the “I’m all right, Jack” brigade to believe, like Hitler, that they are already becoming supermen, and that inferior types should co-exist or be farmed like animals or be put down like vermin. Though tempting, it isn’t really satisfactory to argue that from a human point of view they are the vermin who need to be put down. The answer is to insist that Nature’s way is the “portmanteau” approach to reducing risk of non-survival; diversification allows the species to survive long enough to adapt to its environment.

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