Has the extraordinarily mild US winter been a factor in fuelling the spectacular rise in global sharemarkets?
Certainly, some economists believe so. They argue that investor confidence has been buoyed by signs that a robust US economic recovery is underway, but that this pick-up largely reflects the unusually balmy weather conditions the country experienced in the first two months of the year.
For instance, the US government has reported that the jobs situation is improving, with 227,000 jobs being added in February. But economists argue that the strengthening in the jobs numbers merely reflected the milder climate conditions, which made it easier for workers to get to work, and for consumers to get to the shops. The more temperate conditions also lured out house buyers, pushing up housing sales in the early months of the year.
What’s more, there’s a risk that the pick-up in activity has been magnified in the data. As Gluskin Sheff chief economist David Rosenberg points out, activity typically slows down sharply in the winter months because many people are snowbound. As a result, seasonal adjustment factors adjust for this slow-down by boosting the raw data.
But this year, the mild weather – January and February were both 5 degrees warmer than usual in the United States – meant that there wasn’t the same weather-induced slowdown in activity. And this has resulted in severe distortions in the economic data – particularly for housing, employment and spending. There is now a risk, he says, "that we wake up some time in the second quarter and discover that the economy may well have contracted if not for the extremely warm weather we had in the opening months of the year, which provided a huge, if not unprecedented, skew to the data.”
He estimates that more than 40 per cent of the jobs gains we saw in January and February were weather-related. But productivity is declining, which will cause companies to curb their hiring. And there are already some indications in some surveys that companies are beginning to cool off on their hiring plans. As a result, he says, the number of new jobs that are being created could start falling sharply in coming months.
This wouldn’t necessarily be disastrous. But Rosenberg warns that it was precisely "this sort of sluggish backdrop that brought at least a temporary end to the equity market rally last year and forced the Fed into more intervention in support of the bond market. Don't write off QE3 just yet.”
In addition, Rosenberg points out that the warm temperatures in January and February meant that US consumers spent less than usual on their heating bills – which meant they had an extra $30 billion or so in their pockets to spend. Without that extra cash, he says, "retail sales would have stagnated over the past three months as opposed to rising at what appears to be a healthy 8 per cent annual rate.”
But, he warns, that spending bonanza will soon disappear, and the US consumer now faces the challenge of petrol prices that are now heading towards $4 a gallon.
Rosenberg notes that the rise in the S&P 500 so far this year has been similar to that seen in 1998, but the economic backdrops of the two rallies could not be more different. "What we are seeing unfold really is a liquidity-induced rally that is built on a lot of hope. Neither were required in 1998 – the Fed kept a neutral policy in place for most of that year and there was no need for hope; the growth in the economy was organic and self-sustaining without unprecedented government assistance.”
Even so, he notes, in mid-1998 there was a correction of close to 20 per cent. "Nothing moves in a straight line indefinitely.”