Weather's Weird Role in the Slowing Economy

Weather's Weird Role in the Slowing Economy

Bright sun and a mild breeze usually make everybody feel better. But temperate weather may be casting clouds over the economy.

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Data from the last few months reveal a worrisome stall in growth, for reasons that aren't completely clear. Recent employment reports show a discouraging slowdown in hiring. Business spending has been weaker than expected. Consumers, absorbing all the bad news, have been losing confidence and spending less, too.

Clement weather, ironically, might be partly to blame. One of the warmest winters on record generated buoyant economic activity during the first few months of the year, including robust spending and a healthy pace of hiring. It only seemed logical that some of that spending would have been pulled forward from later in the year, since mild weather doesn't create more money, it just gives consumers a reason to spend it sooner. And on cue, economic reports for April and May showed some givebacks.

The question now is whether the economy will rebound from the spring downturn, or remain stuck in a rut. A summer snapback would suggest weather trends did in fact create an exaggerated boom-bust cycle earlier in the year, with the economy returning to a more normal (and comforting) growth level.

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But many economists think that should have happened already.

"The longer the slowdown persists, the less we can blame it on the weather," Bank of America Merrill Lynch recently advised clients. If weak growth continues, it will most likely mean there are deeper problems in the economy. It's not hard to guess what those might be.

The financial crisis in Europe is clearly constricting growth in many regions, and small steps to fix the problem so far haven't convinced investors the worst is over. In the United States, there's growing concern about how Congress will handle a momentous set of tax hikes and spending cuts set to go into effect at the end of the year. If Washington bungles the job and tumbles off the "fiscal cliff," another recession is likely.

The real question is how much those worries are depressing business and consumer spending in the present. The recent drop in oil and gasoline prices ought to provide a mini-stimulus that boosts consumer spending a little, but that hasn't shown up so far in the economic data. An incipient housing recoveryâ€"especially in multifamily constructionâ€"ought to be providing a boost as well, but that's not moving the needle either.

If the jobs report for June and other key indicators are underwhelming, it will probably be safe to say we can no longer blame a weak economy on the weather. And there are some important fingers in the air. The Federal Reserve is closely watching the forthcoming data, which could determine whether it kicks off another round of quantitative easing in the fall. And of course the direction of the economy over the next few months will help determine who wins the presidency in November. Guessing the outcome is about as easy as predicting ... well, you know.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.