Weather and Economic Data

The harsh weather we have been experiencing this winter has in many cases tempered the rosier view of the economy that most had as we entered 2014. It seems the debate among market economists is what impact this winter’s lousy weather has had on economic data. U.S. industrial production has declined, retail sales have fallen short of expectations, mortgage applications have fallen, auto sales have slowed and housing data has disappointed. Even restaurants have reported disappointing sales.

It seems logical to us that the weather has had some impact, as industrial and consumer activity is typically scaled back when there is snow and ice on the ground and/or temperatures are well below freezing.

As a result, the likely outcome is that the recent downtrend in the data is only temporary, meaning that rising temperatures in March and April should benefit consumer and industrial activity. If this is the case, then the U.S. economy should return to its rising trend. According to Guggenheim’s Scott Minerd, “Based on past experiences where cold weather depressed retail sales in January, there could be a meaningful rebound in consumer activity in the coming months as pent-up demand is released.”

There have been questions about whether or not the weaker-than-anticipated data will have any impact on Fed policy. So far, the Fed has stayed the course, continuing its efforts to taper its quantitative easing policy. It seems unlikely the Fed would alter policy based on short-term swings, but if the weakness continues even as the spring thaw starts, the Fed could change course.

To a large extent, we view these events as mostly noise. Short-term fluctuations in economic data typically have little lasting impact on the market, and as a general rule, they should not materially affect the intrinsic value of companies. However, they can cause short-term swings in security prices. This may create opportunities for investors focused on the long-term.