February Weather a Headwind for Economy

February has come and gone, but plenty of economic data on February activity is still on its way. Vehicle sales and the ISM manufacturing reports are among the first February numbers to be reported, and they were reported a bit lighter than expected. Is this any reason to panic? We don't think so. More likely is that unusually bad winter weather will hold back some data for February before a rebound this Spring.

Some analysts note that national average temperatures were just a little below normal in February. But the national average is weighted by region size (not population) and includes some normally temperate winter areas (like California, Nevada, and Arizona) being even warmer than normal. While the Midwest and Northeast experienced record low temperatures and major snow storms, the west coast experienced a warm front.

For economic purposes, it's important to know that if an area that's normally 65 degrees in the winter is instead 75, the extra warmth has very little effect on business. By contrast, if an area that normally averages 35 degrees, instead, averages 25, the negative impact can be large. In other words, "average" national temperatures can hide a problem, like the statistician who drowned in a river with an average depth of 2 feet.

Lucky for us, there is a better measure of temperatures for the purpose of estimating the impact on business activity. The National Oceanic and Atmospheric Administration (NOAA) calculates something called "Heating Degree Days (HDD)," which measures how much more heat we need to bring the whole country up to 65 degrees. So the higher the HDD index, the colder it is, or was, for the most people.

One reason HDD is so useful is that it completely ignores the regions where the weather is already good enough for normal business activity. The other reason it's useful is that, unlike the national average temperature, the HDD index is weighted by population size. And what did NOAA say about February? That it had the highest HDD index (coldest temperatures) for any February going back to 1979. If you spent time in Cleveland or Detroit, you experienced the coldest February in more than 100 years. In New York? The coldest February in 80 years. And Boston not only saw their second coldest month on record, they have also been hit with over 100 inches of snow so far this winter. They're still digging out.

So it is no wonder economic activity in February may have taken a dip. Housing starts and manufacturing activity, in particular, may feel the chill, while utilities likely saw a boost. Whatever the impact from the snow, ice, and chill, we expect it to be temporary. When the spring thaw eventually comes – and it will – expect the Plow Horse to make up lost ground.
Posted on Tuesday, March 3, 2015 @ 3:26 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.