Investors who want to divine the outlook for U.S. economic growth should look at the weather. David Woo’s rule: the colder, the slower.
Financial markets tend to overreact to abnormally warm or cold conditions, said Woo, head of global rates and currencies at Bank of America Corp., in a Feb 4. report. He found a 48 percent correlation between first-quarter economic growth and temperature over the past decade.
With Woo calculating January to be the coldest in the U.S. since 1988 and February set to stay chillier than usual, his growth prognosis isn’t optimistic. Much of the Northeast this week faced snowstorms and more may come this weekend.
The coldest December since 2009 already helps explain a slowdown in employment growth, said Woo. He found that over the past decade, a 1 degree Celsius (1.8 degree Fahrenheit) drop below December’s historical norm has led to that month’s non- farm payrolls coming in an average of 38,000 below forecasts.
A 1 degree Celsius drop in temperature in the first quarter is associated with an average 1.5 percentage point decrease in gross domestic product growth since 2004. One explanation is that retail sales are more sensitive to temperature in January and February than in December, when Christmas leads people to shop, he wrote.
“We are concerned that the market may struggle to see through the ill effects of the current unusually cold winter,” New York-based Woo said.
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