

The Polar Vortex Could Freeze Economic Growth

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Photograph by Aaron Burden
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The U.S. economy always shrinks in the winter, with or without a “polar vortex.” Since 2002, America’s gross domestic product has dropped about 13% at an annual rate, on average, between the last three months of each calendar year and the first three months of the next one.

The coming of January means holiday shopping is over and families have less traveling to do. More important, the transition from autumn to winter makes it less pleasant to be outside in large parts of the United States. Cold weather reduces spending on everything from bars and restaurants to motor vehicles to new homes. The Bureau of Economic Analysis adjusts its figures for this normal seasonal pattern, which is why the regular GDP decline each winter gets little attention from analysts. The unadjusted data weren’t even available until last summer’s comprehensive update of the National Income and Product Accounts.

While there are still two months left in the quarter, bad weather in much of the country this winter—the so-called polar vortex—could be severe enough to have a meaningful economic impact. Extreme cold and heavy snowfall freeze commercial waterways, prevent flights, block roads, and deform railroads. Life-threatening temperatures should deter even the most serious shoppers and committed construction workers, to say nothing of people indifferent between eating leftovers and going out to restaurants.

The polar vortex of early 2014 is a useful precedent. Despite a booming domestic economy and the normal seasonal adjustment, U.S. GDP shrank at an annual rate of 1% in the first quarter of that year. Motor vehicle sales, employment, and construction were all affected by the unusually harsh winter for Americans in the Midwest and Northeast—about 40% of the U.S. population and economy.

At the time, Atif Mian and Amir Sufi found a reliable link between the weather and the decline in vehicle spending. People in places that were significantly colder than normal tended to cut their spending while people in the rest of the country, including places where temperatures were higher than normal, such as in the West, tended to increase their spending.

Looking back a year later, Justin Bloesch and François Gourio of the Federal Reserve Bank of Chicago found that harsh winters generally lead to higher unemployment, lower home-building, and reduced vehicle sales, with the employment effects concentrated in construction, bars and restaurants, and retail. Encouragingly, they also found that the economic consequences of extreme events end up disappearing after a few months as the weather reverts to normal. According to their estimates, the polar vortex “is insufficient to explain the magnitude and timing of the slowdown” at the beginning of 2014 even though it likely contributed to the overall weakness observed in the data.

It is currently too early to see this year’s extreme weather in the data. The Federal Reserve Bank of New York’s “Nowcast” model currently estimates this quarter’s GDP will come in at 2.2%, but it hasn’t been updated since January 18. Even if the government shutdown had not impeded the timely publication of economic reports, it would still take weeks before the initial effects of the bad weather would appear in data on home-building, vehicle sales, and jobs. Expect to see the impact by March.

Write to Matthew C. Klein at matthew.klein@barrons.com