Blame It on the Weather:
The Economic Effects of Unusual Events

Many parts of the United States experienced a particularly harsh winter. The Midwest and Northeast suffered the toughest blows from a stream of heavy storms. Boston’s record seasonal snowfall topped 110 inches.1

As winter was settling in, U.S. economic growth fell to a seasonally adjusted 2.2% annual rate in the fourth quarter of 2014.2 Disappointing data on retail sales, manufacturing production and orders, housing starts, and payrolls suggests that gross domestic product (GDP) growth cooled further in the first quarter of 2015.3

Meanwhile, on the opposite coast, the weather was warmer and drier than normal. California is coping with possibly the most severe drought in its history.4 Here’s a closer look at some potential short- and long-term effects of these two extreme weather events.


Good-bye Winter
Many economic reports are seasonally adjusted, because even normal winters could skew the data and create a distraction from more serious economic problems. Still, when severe weather falls outside of historical norms, it can be difficult for economists and policymakers to gauge current economic conditions and produce accurate forecasts.

There’s no doubt that a number of powerful winter storms put a damper on economic activity in early 2015, but the jury is still out on how much of the weakness can be attributed to the weather. One early projection was that winter storms might have reduced first-quarter GDP growth by less than one percentage point, to an annual rate of 1.2%. However, in April, the government reported that GDP increased at an annual rate of only 0.2% in the first quarter.5

Hope for a Bounce
When weather takes a toll on GDP growth, it’s generally considered to be a temporary factor. In fact, weather-related periods of weakness are often followed by a significant rebound. That’s because some business activity that is delayed, such as construction, can be made up in the next quarter. Some losses, like those from canceled flights or restaurant meals, are never recovered.

In 2014, for example, U.S. GDP contracted 2.1% in the first quarter before expanding 4.6% in the second quarter and 5.0% in the third.6Overall, the disruption from winter storms was more severe and widespread in 2014 than it was this year.

Dealing with Drought
California experienced its warmest winter ever, with temperatures averaging 4.4 degrees above the state’s 20th-century average.7 Most of California’s water supply comes from annual snowmelt from the Sierra Nevada mountains, but the record-low snowpack was just 5% of the March historical average.8 California reservoirs have only about one year’s worth of water left.9

A $1 billion emergency relief bill will aid drought-affected communities and fund water recycling and flood protection infrastructure.10 The governor also ordered the state’s first mandated water restrictions. Cities and towns must cut their water usage by 25%.11 Communities will decide how to accomplish this goal, but in many cases customers (including golf courses, campuses, and other large landscapes) will be forced to limit watering, heavy users will pay higher rates, and water wasters could be fined. Already, restaurants may serve drinking water only on request.12

Costs and Consequences
It’s estimated that California suffered $2 billion in economic losses in 2014, and the drought could cost another $3 billion — and 20,000 jobs — in 2015. California’s agriculture and food-processing industries are taking most of the hit.13 Without the normal allocations from the California Department of Water Resources, many farms must leave fields unplanted, buy more expensive water from private sources, or pay higher electricity bills to pump well water.14

Some farms survive by tapping into deeper wells. But research shows that land is sinking in some places, and the ground water supply is being depleted at an unsustainable pace. It could take a decade or more of normal precipitation for the state’s underground aquifers to recover.15

California produces nearly half of U.S.-grown fruits, vegetables, and nuts, but surprisingly, many economists do not expect higher-than-normal food inflation for 2015.16 Food supplies are national and even global. Some production could shift to other regions, while local farmers prioritize high-value crops that are not grown elsewhere. Still, each year that the drought continues to impact supplies increases the odds that food prices will rise.

A recent legislative report concluded that the drought will have a limited effect on the state’s economy in 2015. California’s $2.2 trillion economy is diverse; farming and related businesses account for only about 3% of state GDP.17

Many residents and businesses are installing drought-tolerant landscapes with more efficient irrigation systems, and are trying to break other wasteful water habits. Although current conditions may be difficult, California might benefit in the long run from the public’s heightened awareness and focus on conservation.

1), April 21, 2015
2, 6) U.S. Bureau of Economic Analysis, 2015
3) The Wall Street Journal, April 6, 2015
4, 8, 10–11), April 2, 2015
5) St. Louis Post-Dispatch, April 7 & 29, 2015
7, 9) The Atlantic, March 2015
12) California Environmental Protection Agency, 2015
13–14), March 30, 2015
15) The Washington Post, August 17, 2014
16) MarketWatch, April 2, 2015
17) California Legislative Analyst’s Office, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.