The Economics of Snow: Blizzard Impact Will Be Temporary

WEST CHESTER, PA (TheStreet) -- A severe snowstorm has its sights on the Northeast, and while it will interrupt millions of lives and forcing businesses to close, its economic impact should prove temporary.

Economic output in the region between Boston, greater New York City, Philadelphia totals about $2 trillion per year, just around 12% of national GDP. At 250 working days per year, daily output in the region is worth about $8 billion. Two days of lost output thus equals $16 billion, which isn't unrealistic.

These are preliminary estimates and we can fine tune them once we see what areas are hit the hardest. Still, this storm shouldn't have a significant impact on first quarter U.S. GDP, as a good chunk of this lost output will be made up in subsequent weeks.

Though economic data, including employment, are adjusted for seasonal changes to eliminate the impacts of weather and other seasonal factors to better gauge cyclical changes, snowstorms can still cause disruptions.

Potentially amplifying the storm's national fallout are disruption to northeastern seaports, airports and rail lines. The Port of New York and New Jersey is closed and thousands of flights could be canceled.

Weather normally has a temporary impact on the economy. The economic implications of a severe snowstorm differ from a natural disaster or even a colder than normal winter. A natural disaster is an economic disaster, but historically economies have bounced back quickly. While natural disasters are a big initial hit to the economy, they usually generate a lot of economic activity in the immediate aftermath. Historically, economies hit by disasters are made more or less financially whole through insurance money and government aid.

Depending on the severity of the snowstorm, its impact on the economic data will vary. Normally, unusual winter weather has significant effects on monthly nominal retail sales, housing, factory production and employment.

For retail, the impact varies by segment and the effect is lessened for an entire season. Unlike other natural disasters, snowstorms are known days in advance and consumers rush out ahead of the storm. Timing is everything. If a storm hits this late in the month it may push some spending into February.

A severe storm that prevents consumers from shopping is only a temporary drag on spending because many of the purchases put off are made up soon after the storm. For some retailers lost sales might have shifted to nonstore retailers. The big losers during severe snowstorms are restaurants because those lost sales not recouped.

Weather can cause the composition of spending to shift. Therefore, looking at only retail sales is misleading, as it does not include services, which make up the largest share of nominal consumption. Depending on power outages, the snowstorms impact on spending on electricity, heat and other utilities could vary.

Read Ryan on Moody's Analytics Dismal Scientist.

Because the winter is typically a slow month for residential construction, a severe snowstorm could weigh on home-building temporarily. The New York, Boston and Philadelphia metro areas account for only 7% of U.S. housing starts, so the potential impact on national housing starts is minimal.

Impact on Employment

The weather impact on employment from this snowstorm is likely to be limited, however. In order for a job not to be counted in the payroll survey, an employee would have to be out of work because of the weather for the entire pay period, which includes the 12th day of the month. For workers who are paid on a weekly basis-about one-half of the workforce-a weather-related disruption can result in a full week away from work. For the remainder, who are paid less frequently, it is unlikely that even a severe winter storm would keep workers away for the entire period.

In the household survey, workers are still classified as employed if they are temporarily away from work because of bad weather. By this definition, they could be away from work for the entire pay period and still be counted as employed. Of course, if the bad weather were to lead to an actual layoff, they would not be counted as employed. Thus, if there is an impact on employment from the weather, it is more likely to show up in the payroll survey than in the household survey.

Destruction Fuels Economy?

Anytime weather and economics mix, the broken window fallacy is debated. The broken window fallacy is based on the idea that destruction does not stimulate the economy. This is widely debated among economists and nearly always surfaces after natural disasters.

The parable of the broken window was introduced by French economist Frederic Bastiat in an 1850 essay. Bastiat's tale starts with a man's son breaking a pane of glass, forcing the man to pay to replace it. That adds to economic activity, but Bastiat argues the man is not better off. Bastiat observed that while the immediate benefit of spending on reconstruction is visible, the lost opportunities to spend elsewhere are "what is not seen."

Bastiat's analysis holds only if the man would have spent the money on something else. This likely does not hold today given the significant amount of spare capacity and cyclical unemployment in the affected regions of the snowstorm. Therefore, government spending and some out-of-pocket expenses for residents will provide a lift to economic activity, as it would not have been deployed otherwise.

Read Ryan on Moody's Analytics Dismal Scientist.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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