Winter Thaw Will Lead to Optimism in Spring
Oceanside, CA – There is a wise adage that says: “Don’t mess with Mother Nature.” Since December, even the U.S. economy has felt her wrath. So pervasive and extreme have been the heavy snowstorms and bitter cold, millions have stayed at home for days at a time from December through February, and in doing so, have frozen a big chunk of economic activity.
The unrelenting winter weather will also chill the economy for the next two months. As we go to press, the storms are still raging. Frank Chow, Trade Show Executive Media Group’s chief economist and weatherman forthe day, discusses if and how the storms will impact the mildly optimistic outlook for the economy.
First, the length and magnitude of the freezing cold and heavy snowfall was far-reaching, affecting 32 states, with some media calling it “Snowmaggedon.” Some of the major closures/outages included:
1. Airlines canceled a record 75,000+ domestic flights from December 1 to mid-February, and over 300,000 more were delayed. As a comparison, Superstorm Sandy caused 21,000 cancellations.
2. Amtrak ceased service in the Northeast Corridor during the February storms.
3. Major transportation corridors across many states were closed or restricted.
4. Nearly 800,000 homes and businesses lost power across 11 states along the eastern seaboard, with 340,000 outages in North and South Carolina.
5. The U.S. Postal Service suspended deliveries in seven states.
Some economists have estimated $15 billion was lost to U.S. businesses so far. One of the hardest hit was auto dealers as severe winter weather kept buyers away. In January alone, vehicles and parts sales dropped (2.1)%, or roughly $1.7 billion, according to the U.S. Department of Commerce. The airline industry took a hit, according to masFlight, an aviation operations data company, which issued a report stating about 30 million passengers faced canceled and delayed flights in January. This cost passengers more than $2.5 billion and airlines up to $150 million. The eventual storm damage costs will likely be many times $15 billion when considering the impact of softer retail sales, property and crop damage, and lost worker productivity.
However, unlike the tsunami disaster in Japan, which permanently disabled many of the country’s nuclear power plants, economists like Chow believe the economic damage will be short-lived and transitory. “Much of the costs will be offset by a pickup in sales and production later this year once temperatures rise,” said Chow, “Thus the lasting impact on the $16 trillion U.S. economy should be minimal.” Chris Christopher, Jr., an IHS Global Insight economist who tracks consumer spending, said, “If the First Quarter takes a little hit, there’s going to be some bounceback to make up for it in the Second Quarter.”
The Flow Back Effect
Throughout the economy though, there are winners and losers when severe weather strikes. Chow noted that for every stranded passenger who had to shell out money for hotel rooms and meals, those expenses flow back into the economy as airport area hotels and restaurants enjoy a surge in business. New cars not bought in the Winter represent pent-up demand in the Spring. That’s why the overall net impact of severe weather typically amounts to a tiny fraction of the economy long-term, Chow said.
Economists estimate the unusually cold weather during the past two months could cut $5 billion of future economic activity, mainly because increased demand for energy has pushed prices higher. Consumers and businesses are spending billions more in heating fuel. Utility bills in some states have tripled, but most have gone up by 15% to 30%. This higher expense is not likely to be made up by insurance payments or direct government aid, like for Hurricane Katrina and Sandy victims who had more extensive property damage. In turn, consumers may curtail spending the rest of the year to make up for the loss. “That’s why economic growth forecasts are being shaved and many economists are citing the nasty weather,” Chow said.
Rising Fuel and Transportation Costs
Unfortunately, the price of gasoline also rose in February, but an increase is usually inevitable this time of year, Chow pointed out. “Prices at the pump have risen an average 31 cents per gallon in February for the past three years, but are currently 8% lower than last year due to plentiful gas supplies,” he said.
However, with the end of the winter in sight, refinery output is expected to slow down. Refiners conduct typical seasonal maintenance and switch to more expen-sive Summer gasoline formulated to meet clean air rules, and they don’t want to be stuck with unsold winter gas. That reduced production causes gas prices to rise as the U.S. driving season approaches. “If maintenance goes as planned and the weather stays nasty — suppressing demand for gasoline — prices shouldn’t spike too dramatically,” Chow said.
Milder Growth – Is It Temporary?
Recent government reports portray an economy that seems to be slowing:
- January employment growth was 113,000 jobs, a bit disappointing. The good news is the unemployment rate dipped 0.1 to 6.6% for the right reasons as the labor participation rate went up, reversing the dismal December report.
- Growth in personal income, disposable personal income, and personal consump-tion expenditures all slowed from November to December.
- January retail sales fell (0.4)% and December was revised down to a (0.1)% decline. Excluding auto sales, the numbers were slightly better, but still a big letdown.
- Factory production swooned (0.8)% in January — the biggest drop since May 2009, while overall industrial production declined (0.3)%. The Federal Reserve report blamed the weather.
April Results are Key
Economic growth was definitely on the upswing through the latter part of 2013. GDP growth surged an average of 3.7% as exports climbed and inventory stockpiles jumped. Prior to that, GDP grew an average 2.1% for eight quarters.
“The extreme weather has placed a fog over the economy where it’s difficult to discern whether it is truly slowing or is temporarily stalled,” said Chow. “I don’t think we will know until April if the economy will resume the trajectory from the second half of 2013,” said Chow.
Evidence of a shift, however, comes from a look at key economic indicators in recent months: results are better than last year for the same period. For example, year-over-year growth in industrial production was 3.3% in the Fourth Quarter of 2013, said Chow. This was up from 2.6% in the Third Quarter and 2.0% in Q2. Industrial production in January was 2.9% more than in January 2013. “This gives credence to the argument that the weather created a soft patch in the economy and will resume when the snow thaws,” said Chow. Also, consumer sentiment from Thomson Reuters/University of Michigan Consumer Sentiments Index held steady in early February at 81.2, unchanged from January, he noted.
Meanwhile, Chow warned that dismal reports will probably persist until April and should be taken at face value rather than causing a panic like what occurred in the stock market for a few weeks. Here’s why:
1. Jim O'Sullivan, chief U.S. economist for High Frequency Economics and dubbed the most accurate forecaster in America over the past ten years by MarketWatch, believes the economy will be fine despite the weather. Regarding a possible slump, he said, “I don’t see where it’s coming from.” O’Sullivan predicts the economy will grow 3.3% this year, the highest in the monthly Blue Chip Economic Survey.
2. Three top travel companies in U.S. — Expedia, Priceline, and Orbitz — experienced strong revenue growth in 2013 and are forecasting continued bookings acceleration for 2014. “The travel-booking industry is generally viewed as a good barometer for consumer spending, as travel is considered discretionary spending which consumers cut back during a downturn,” Chow pointed out. “As such, growth in the industry sends a positive signal about the overall economy.”
3. Janet Yellen, in her first speech as the Fed Chair, assured Congress in February that there will be a “great deal of continuity” with policies established by her predecessor, Ben Bernanke. She all but guaranteed the Fed will keep its key short-term interest rate near zero for a prolonged period.
Trade Show Forecast
Trade Show Executive’s Exposition Forecasting Board is bullish about 2014 after years of caution. They are forecasting modest growth in the months ahead, buoyed by strong performance in the key sectors of construction, technology, and most retail-based shows. The health-care sector, as analyzed in TSE’s Medical Show Report in the insert between pages 18 and 19, will continue to reflect above-average growth in certain specialties while others remain under pressure, burdened by government regulations. M&A activity has heated up and launches are on the upswing. Keep up-to-date on upward or downward shifts with Trade Show Executive’s E-Clips Breaking News and Trade Show Executive’s News Tickers, often released hourly.
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