How The Heat Affects Economic Data

Investors are predisposed to ignore weather as an excuse for bad earnings. However, in some cases highly unusual weather patterns impact economic data in a way that must be accepted as a one-time event that doesn’t imply a cyclical phase change. The most obvious is during hurricanes motor vehicle sales fall and then in the month following the storm sales increase because cars that were destroyed need to be replaced. This past December was a historically hot month which led to an increase in housing starts and a decrease in utilities production. Before we get to those reports, let’s look at the weather.

As you can see from the map below, most of the country had above-average temperatures. That trend was pronounced in the Midwest and the South.

Source: NOAA

The South is the nation’s largest housing market. That explains the big boost in housing starts. Specifically, this was the 6th warmest December in 125 years. Temperatures were much above average in 9 states, 7 of which are in the South.  

A Continuation Of The Industrial Production Slowdown

December industrial production growth met estimates and manufacturing growth beat them, but November’s growth was revised lower. Growth was hurt by motor vehicle and parts production and utilities production (because of the warm weather). As you can see from the chart below, the 3-month weighted average of the percentage of manufacturing sub-sectors contracting fell, but sequentially the percentage rose. Specifically, monthly the percentage of sub-sectors in recession increased from 56.6% to 68.9%. Because September’s reading of 86.6% was no longer in the 3-month average, it fell. 

(Click on image to enlarge)

Source: Oxford Economics

A Breakdown Of Industrial Production

Monthly industrial production growth was -0.3% which met estimates. November’s growth was revised from 1.1% to 0.8%. This still tough comp partially explains why growth was negative. Monthly manufacturing growth was 0.2% which beat estimates for -0.2%. Just like in the overall report, November’s growth was revised lower; it fell from 1.1% to 1%. November’s capacity to utilization rate was revised down from 77.3% to 76.6%. December’s reading of 77% missed estimates by 0.1%. Capacity to utilization was down 3.1% yearly. This was the 9th straight month it fell. The expansion peak was 79.6% in November 2018.

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