Similar to a living and breathing organism, the stock market’s mood and behavior can be affected by the weather. Seasonal changes already affect trading activity on a regular basis, true to the “sell in May and go away” adage. But no other season impacts the economy as much as an unseasonably bitter winter.
Many people view bad weather as a comforting entity. Some might imagine sipping hot tea in their kitchen, while a storm rages outside the window. Others may see it as a vacation day off from work. But the economy doesn’t see bad weather as anything other than what it is – a destructive force that cuts into productivity, causes damage, and eats away at goods and services that could otherwise be used to build and grow the economy.
The Devastation of Incorrectly Predicting Winter Weather
The winter brings with it bitter cold and piling snowfalls, which is entertaining if you’re a child, but can be disastrous and unpredictable for business. Going into the winter season, the price of oil and natural gas jump, as they are essential commodities for heating homes and businesses. Not necessarily a bad thing, but it does mean that investors have to guess how cold or mild the winter will be. If estimated colder than it actually is, prices that jumped ahead in anticipation of higher demand will suddenly drop. Whereas, if anticipating a mild winter when in fact winter storms hit back to back, then prices will suddenly jump on limited supply.
Winter also tends to bring damage in addition to snow. The economic impact of regular snow removal can cost a city millions. Downed power lines, road damage and other winter-related issues not only cost money to the government, but impact local businesses that can’t operate at normal capacity. Even a typical winter season slows down productivity, with more difficult driving conditions and increased maintenance requirements. A jump in insurance claims goes hand in hand with winter weather as well.
Using regression analysis, the Federal Reserve Bank of Chicago observed a measurable drop in economic output during the winter months. During unseasonably cold winters, a drop in employment was also measured with the U.S. employment number dropping by 100,000 jobs or more in a single month.
Part of the problem is that weather-related data, such as annual snowfall figures, are generally area weighted rather than population weighted making it hard for economists to estimate the impact of weather events. In truth, hard facts pointing to weather as a sole contributor to drops in economic output are hard to come by, leading to commonly used phrases by the FOMC indicating slowing growth due to adverse winter weather conditions.
Regardless of the exact monetary impact the winter has on the economy, it seems safe to say that it does have a negative influence on productivity and employment figures. The unpredictable nature of weather makes it nearly impossible to estimate how much money to set aside for maintenance, or to accurately predict the supply and demand for heating commodities. This uncertainty repeats yearly, and is part of the reason winter has such an impact on the global economy.