Market Insider

Wicked winter weather chills US economy, stocks

Philadelphia International Airport, which had many canceled flights Monday
Karen Testa | AP

Unusually severe winter weather is expected to dent economic growth and perhaps cause more rough sledding for stocks.

The number and intensity of winter storms have stalled pockets of economic activity across the country, with another system moving toward the East Coast on Tuesday and Wednesday.

Ice paralyzed Atlanta late last month, bitter cold shut Chicago schools and snowstorms in the East halted travel. Add drought conditions in the West, and economists are attempting to determine how much they should deduct from first-quarter growth simply because of the weather.

"We already saw it in auto sales," said Diane Swonk, chief economist at Mesirow Financial. "It literally freezes the economic activity, and you don't get the activity to resume until we get a thaw."

Weather and the markets
Weather and the markets

The disruption to air travel alone has been massive. According to FlightAware, 39,000 flights were canceled last month, the most since 21,000 in October 2012, when Hurricane Sandy pummeled the East Coast.

Those businesses most likely to blame weather for poor results don't get much sympathy on Wall Street, but they now won't be alone. The weather is expected to have been severe enough to affect activity across the broader economy.

(Read more: Best growth in 10 years despite government headwinds)

Weather has been cited as a factor behind a series of squishy economic reports, including December's surprisingly weak jobs number and the ISM manufacturing survey this week.

"It adds insult to injury for retailers and restaurants," Swonk said. "We also had schools closed, so people were out of work there. It's a question mark how much will show up in the payroll numbers."

The January jobs report is expected to show that 185,000 nonfarm payrolls were added last month, up from an anemic 74,000 in December. Economists say the number may have escaped some weather impact because the survey for the report was conducted during a week of milder January weather.

The impact could also show up in ADP's private sector payroll report and in the ISM services sector survey, released Wednesday at 8:15 a.m. and 10 a.m. ET, respectively. Traders expect selling in stocks if those numbers miss expectations, regardless of whether weather can be blamed.

(Read more: Markets fear U.S. chilled by more than weather)

"The price action is telling you that these markets can deal with tapering as long as U.S. growth is picking up, but if the Fed is tapering at the same time U.S. growth is slowing down, that becomes a problem for markets," said David Woo, head of global rates and currency research at Bank of America Merrill Lynch.

Fourth-quarter growth was a strong 3.2 percent, but most economists expect to see a slower first quarter.

Data have "been weighed down by the weather," Woo said. "What worries me is [that the first-quarter] GDP growth is correlated more to the weather than the fourth quarter."

For instance, he found that based on a study of 10 years of activity, retail sales are correlated more to cold weather in February than in December—possibly a negative indicator for first-quarter consumer spending.

Woo expects the weather to continue to be reflected in economic reports, and therefore markets, but said there should be a strong rebound in economic activity this spring.

Correlation between deviation from 3m MA and average monthly temperature
NFP (change) 21% 72% 42% 29%
Retail Sales (m/m) 39% 16% 27% 41%
housing starts (m/m) -17% 62% 23% 41%
existing home sales (m/m) 35% 28% 43% -11%

While still difficult to quantify, first-quarter GDP growth could be impacted by about half a percent, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. He said the weather has a mixed impact on GDP, and he still expects to see 3 percent growth in the first quarter.

"Our spending on utilities would be stronger, and that would be adding to consumer spending," Rupkey said. "That's one thing that argues against the slowdown … but I think net-net, consumer spending on goods that people buy in shops and malls, the slowdown there is going to trump whatever extra spending consumers do to heat their homes this winter. We haven't seen it for a while, but weather can provide a pretty significant headwind for GDP growth."

Citigroup economists cut their forecast last week for first-quarter growth to between 1.5 percent and 2 percent from 2.4 percent, partly because of weather, according to Robert DiClemente, Citigroup's chief U.S. economist.

"The good news is it's winter and it's always winter this time of year," he said. "You don't do a lot of housing activity. Everything shifts down. It's a question of is it normal? … This has been extreme in every way. It's been incredibly erratic."

Economists say winter economic reports are seasonally adjusted to account for bad weather, so there should be some consideration for weather impact, but not this much.

March is the wild card, DiClemente said, as economic activity could jump if the disruptive weather stops and that month is milder.

"The seasonals anticipate normal weather," he said. "My favorite is March ... a month that doesn't belong to winter or spring. And March by its nature is the most volatile month. It could be this ... is the year we get a gangbuster jobs number because it would be the cleanup from the bogus winter effect."

This was supposed to be a better year for reading the economic tea leaves.

"This was the year of no more excuses, no more fiscal drag, no more fiscal headwind," DiClemente said. "We were finally going to see the economy on its own, and along comes this absolutely bizarre winter. I'm hoping we can revise [GDP] up again."

—By CNBC's Patti Domm; follow her on Twitter @pattidomm