Cold wave devastates the U.S. economy! Bank of America: Will lower GDP by 0.5-1.5 percentage points

Despite the fact that the impact of the winter storm "Fern" has largely faded, its "scars" on the U.S. macroeconomy may only just be starting to show. In its latest research report, Bank of America stated that by comparing historical data from the 2021 winter storm "Viola," it was able to quantify the potential impact of extreme weather on first-quarter GDP, estimating that it could cause first-quarter GDP growth to decline by 0.5 to 1.5 percentage points. The report points out that, according to the bank’s chief economist Bhave’s assessment, the scope and severity of this cold wave have directly suppressed consumer spending in the short term. Based on analysis models from the bank’s credit and debit card aggregate data, it shows that weather disasters of similar scale have previously caused a sharp reversal in weekly total credit card spending, and this trend is now reappearing in current economic data. If we calculate according to the most pessimistic scenario, with GDP growth hurting as much as 1.5%, and considering that market strategists’ usual expectation for first-quarter economic growth is only around 1.5%-2%, this means the U.S. economy may face stagnation risks in the first quarter due to the impact of extreme weather. Lessons from history: The collapse in credit card data To evaluate the damage of the recent storm, Bank of America reviewed the February 2021 “Viola” storm that swept across half the United States. By analyzing aggregated credit card and debit card data, Bhave found the shock to consumer spending caused by extreme weather was immediate. "In the week ending February 19, 2021, total credit card spending fell 3.7% year-over-year, while the trend in prior weeks was an increase of about 6%." Excluding seasonal factors and the subsequent spending rebound, Bank of America estimates “Viola” led to at least a 0.6% loss in spending within one month, directly dragging first-quarter 2021 GDP growth down by about 0.5 percentage points. Hidden losses: Cash transactions and GDP drag Bank of America also specifically noted that credit card data likely underestimates actual economic losses. The report states that cash transactions typically suffer even more than electronic payments under severe weather, and other components of GDP are also affected. Taking all these factors into account, Bank of America believes the actual GDP drag caused by “Viola” at the time may have reached as high as 1.5%. This means that if market consensus expects first-quarter GDP growth to be between 1.5%-2%, a severe winter storm is enough to bring U.S. quarterly economic growth to a halt. "Fern" vs. "Viola": Which was more damaging? The report points out that although the two storms were not identical, their economic consequences were similar. "Viola" devastated the southern region, causing long-term paralysis of the Texas power grid; while "Fern," although causing less damage to the power grid, struck the more affluent Northeast. "Fern produced more snowfall in the Northeast, which is home to more high-income families. Therefore, it is not yet clear whether the economic losses caused by Fern will be greater or less than those of Viola." Based on the above analysis, Bank of America provided a final loss estimate: This winter storm could drag first-quarter GDP growth down by 0.5% to 1.5%. The good news is the bank does not believe this will have a lasting effect on the economic trajectory. The upside for second-quarter GDP growth will be as significant as the downside for the first quarter, suggesting strong economic rebound to follow. "The upside for second-quarter GDP growth is as large as the downside of the first quarter." Risk Notice and Disclaimer The market has risks; investments should be made with caution. This article does not constitute individual investment advice, nor does it consider the unique investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing accordingly is at your own risk.