Everybody Talks About the Weather, but Nobody Considers Housing Starts

Mother Nature helps not only ski vacations but construction spending and housing sales too.
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Mother Nature is a creep.

Every third economic release that surprises economists comes with that caveat from forecasters. Rainy days on Mondays and snow on Tuesdays improved, or alternately worsened, the employment picture, construction spending, housing starts, the trade deficit, housing sales, car sales, retail and apparel sales, sales of existing homes, and so on.

"I think we're all guilty of doing that when the number doesn't agree with our forecast," says John Lonski, chief economist at

Moody's Investors Service

.

But in many cases -- and certainly with this somewhat mild (or "clement," as

KeyCorp

chief economist Ken Mayland puts it, taking out the in-) winter -- good weather can improve already-booming sectors of the economy. Conversely, bad weather can make a bad month look worse. And seasonal or yearly climate trends can have an impact not easily witnessed in one month of retail sales data.

In December, nonfarm payrolls grew by 378,000 new jobs, an astounding gain that far exceeded economists' expectations. But more than 100,000 of those jobs were created in the construction sector, largely the province of residential and nonresidential building, and highway work. That's working outdoors in generally warm weather. But subtract those jobs, and the gains still outpaced the forecasts of 200,000 to 220,000. "The first response is to take the defensive and cite the huge jump in construction," says Lonski. "But the gains are still well above what had been anticipated."

Take that a step further. If construction employment is up, housing starts and building permits should increase, too. But remember that gains in this category come with some of the lowest mortgage rates in years and a wealth affect that has prudent investors making more money off their money than ever before. Take away the mortgage rates and put the

Dow

into a vise, and 70-degree weather in February isn't going to lift anyone's spirit into buying a house.

"The fundamentals there are very supportive: low interest rates, over 95% of the labor force working," says Paul Kasriel, chief economist at

Northern Trust

in Chicago. "December and November were warmer than seasonal, and so that has given the housing sector a little extra push. Now, had it not been for the weather, we'd have strong housing, but not as strong."

Reasonable enough. But what about sales of homes, especially the sales of existing homes?

"To tell you the truth, the weather has a bigger effect on housing starts than home sales," says Kasriel. "If you want to buy a house and the weather is normal, you buy a house. If it happens to be a little warmer, that doesn't mean you look at houses more than otherwise. The same with car sales."

However, unexpected weather can affect economic activity over an entire season or more, depending on the timing of the anomaly. Warmer-than-

expected weather at the beginning of winter will cut into retail sales more than in the middle or end of a season. Cooler weather in summer has less of an impact. Some retailers depend on long-term climatic forecasts as a guide to upcoming seasons.

"If the adverse effects are early in the season, retailers may have to discount more heavily to move the merchandise," says Mike Niemira, economist at

Bank of Tokyo-Mitsubishi

. "But what if it happens at the end of the season? It may not matter at all. It's actually probably beneficial because it moves the spring merchandise."

Niemira adds that certain activity, such as home sales, may simply be delayed rather than lost completely because of unforeseen weather conditions. In addition, he says the abnormal swings in a one-month period can run counter to the economic impact that the climate can have on a region. The furor that surrounded tropical storms El Nino and La Nina brought more attention to this issue. While frequently joked about, the long-term climatic trend had a positive impact on government budgets freed from spending on snow removal while it most visibly hurt certain types of retailers.

"Certainly the El Nino story is one of those where it doesn't play out over a single week or month but over a much longer period," says Niemira. "The publicity on that event raised that issue a bit more, that there are weather cycles that do matter and are longer term."

The sustained long-term trend is evident in demand in the energy sectors and other areas of personal consumption, such as housing and transportation costs. However, while the effect on some of these sectors may be positive, they can be negative with regard to government spending, business investment or overall imports. Or vice versa.

Defining the impact of precipitation and warm fronts on such a geographically diverse nation is difficult, economists say. Unlike in smaller nations, bad weather in one region of the U.S. sometimes translates to good in another -- the Northeast enjoyed warm weather in December while snow blanketed the Midwest and Southeast. The impact on one region is offset by the impact in another. Additionally, the impact in one industry is offset by another.