Economy feels heat of warm winter weather

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Turn to the business news section these days, and you might think you accidentally stumbled on the weather report.

Just this week, reports on retail sales, residential construction and industrial production all were delivered with big weather-related caveats, the results strongly influenced by the warmest January on record.

Even the monthly employment report, showing the economy added 193,000 jobs in January, was said to be distorted by unusual weather-related gains in categories like construction and restaurants.

“It’s always a bit difficult to read the economic data in the winter, just because activity is thinner, and the vagaries of weather are more pronounced,” said Mark Zandi, chief economist of Moody’s “So it’s not unusual to see, although this is an extraordinary amount of volatility.”

Based on an extraordinary wave of weather.

Even by the inflated standards of recent record-warm years, January was a freakish standout, steamrolling the record book with a national average temperature that was nearly 9 degrees above normal. All 48 mainland states, from Maine to California, had warmer-than-average weather, and 41 posted temperatures that were either much higher than average or broke records.

“It wasn’t even close — it was the warmest by far,” said Bill Kirk, vice president of Weather Trends International, a private weather forecasting and consulting company. “Pretty much the whole country shattered records.”

The bizarre January weather is wreaking havoc on many economic indicators, making it a bit hard to tell how strongly the economy is bouncing back from a fourth quarter that was itself dragged down by Hurricane Katrina’s devastation.

Consider the evidence reported this week:

  • Residential construction surged 14.5 percent in January to its highest rate in 33 years as builders took advantage of the snow-free weather to lay the foundation for new homes and apartment buildings. The result defied other signs of a housing industry slowdown, and analysts said they still expect housing starts to weaken later in the year.
  • Retail sales unexpectedly jumped 2.3 percent in January that was fueled by warm weather as well as a surge in gift card redemptions. Merrill Lynch figures sales would have been up only 1.8 percent if January’s weather had been closer to normal.
  • Industrial production fell in January, mainly because utility company output fell 10 percent from December, the largest one-month drop ever recorded. “Do not read too much into the weak January reading as the entire decline was due to the weather,” Moody’s analyst Zoltan Pozsar said in a commentary.

Still, based on the generally strong economic data reported so far this year, many economists are looking for gross domestic product to grow at a 5 percent rate in the current quarter, compared with 1.1 percent reported for the fourth quarter. GDP growth, which measures the total output of the economy, is likely to slow to a rate between 3 and 3.5 percent later in the year.

The impact of the warm weather on the housing sector last month was perhaps the most startling, as analysts already had seen strong evidence of a long-awaited slowdown in the red-hot sector and were expecting more. But the big housing starts number was immediately discounted, even by economists who are generally optimistic about housing prospects.

“It’s not really a surprise,” said Jim Glassman, senior U.S. economic at J.P. Morgan Chase. "It just tells you they’ve dug a lot of holes. I think it’s mainly a weather distortion, and we’ll see a big payback.”

Some analysts said builders have extra motivation to get those holes in the ground and finish construction as soon as possible, in case the market tumbles and buyers disappear. KB Home, a major home builder, said this week that cancellations are rising, and luxury home builder Toll Bros. has reduced its 2006 sales forecast twice in the past three months.

“My view is these guys are out there, they have got some good weather, they have seen some cancellations," said Joel Naroff of Naroff Economic Advisors. "They want to get these things in and closed, try to get them into the hands of people as soon as they possibly can.”

Consumers think spring
Retailing is another industry that has enjoyed a highly visible weather-related boost.

“Clearly the effects are sizable,” said Michael Niemira, chief economist for the International Council of Shopping Centers.

“It certainly helped retail sales,” he said. “It helped housing, it helped anything that would be outdoor-related.”

On the flip side, sales have withered for propane, natural gas and other heating fuel as well as winter goods like snow shovels and rock salt, much of which was being sold at a discount this month when the Eastern seaboard was finally hit with a major winter storm.

In general, the timing of the January warm spell was fortuitous for many retailers, coming just as they were bringing in new spring merchandise, said Ed Carroll, executive vice president of marketing for Carson Pirie Scott, which operates about 140 department stores across the Midwest.

“I think we probably had sales we wouldn’t have had, just because the weather was  abnormally warm,” he said. “There was more traffic in the stores. Psychologically, as well, people are starting to think spring.”

Of course February rolled around and changed all that, bringing winter weather so harsh that some stores had to be closed this week. Still, Carroll was optimistic that the cold snap would help the stores clear out fall closeout merchandise that has been languishing.