Is the Midwest Deep-Freeze Affecting the Economy?

And Can it Impact My Portfolio?

Is the Midwest Deep-Freeze Affecting the Economy?
January 22, 2014

During the first half of January, a weather phenomenon called a Polar Vortex assaulted much of the American Midwest and East. This Vortex brought extremely cold Arctic air, dropping temperatures to historic lows. These temperatures produced dangerous conditions that killed 8 people, while disrupting travel and commerce throughout much of the country. Then, as the Polar Vortex retreated, residents of the upper Midwest and East were pummeled by a series of smaller, but still ferocious “Alberta Clipper” storms that continue raging today into the third week of January.

Apart from the tragic loss of life we have seen, what is the economic toll of these storms? And are there likely to be any long-term consequences?

There is certainly short-term economic damage. An estimate by Planalytics, specialists in business weather intelligence, projects a net loss to the economy of $5 billion — unpleasant, but relatively small compared to a $15 trillion GDP. (Planalytics calculated that a similar cold blast in 2010 cost the US economy $25 to $30 billion; while the temperatures were even lower in this episode, the 2010 event lasted considerably longer.)

Most economists agree, and expect the long-term effect to be negligible. Nariman Behravesh, the Executive Vice President and Chief Economist for IHS Global Insight, predicts a possible 0.1-0.2% reduction in the 1st quarter GDP for 2014, but expects these reductions are likely to be recovered in the second quarter. His estimate seems reasonable, given the limited effect of the 2010 deep freeze.

There are short-term, localized economic winners such as tow-truck and auto body services, and travel services (as people try to escape the cold); similarly, there are losers, such as retailers suffering from decreased traffic. At least retailers can be thankful that this cold snap didn't hit before Christmas. However, in the broad scale, most sectors should experience only temporary losses. Commodities such as wheat and cattle are not reporting overwhelming problems, and the cold snap didn't reach the Florida citrus crop.

If there are sectors to watch, it would be energy and transportation. While supplies are generally sufficient to meet the sharply higher demand for natural gas and heating oil, many producers are experiencing short-term issues with fracking, drilling, and refining operations that could cause them heartache. Facilities from Texas to North Dakota to the Northeast are facing colder temperatures than they were designed to handle, causing instrument malfunctions.

For example, refineries at Exxon Mobil (NYSE: XOM) and Marathon Petroleum (NYSE: MPC) have experienced weather-related production issues. Fuel terminals are extremely busy, and the transportation problems caused by snow-packed and icy roads compound the situation. Also, some gas wells in Pennsylvania completely froze up, forcing affected companies to buy during a time of higher prices to meet their obligations.

Even with these issues, natural gas futures are continuing to fall — suggesting the market is shrugging off the great winter storms of January, 2014 as a relatively short-term annoyance.

Airlines are taking a significant short-term hit as they absorb the costs of stranded planes and the expenses of housing stranded travelers. Even with clear weather, the extreme cold has cancelled numerous flights across the Midwest and Northeast due to freezing fuels and supply lines. Yet the effect on airline stocks is probably transient at best. David Fintzen, an airline analyst with Barclays, notes that airline earnings are more related to fuel costs and general economic trends, and that the market increasingly looks past short-term travel issues.

In summary, unless there are prolonged successive cold snaps, the market should have few issues in the intermediate and longer term. Unless you are heavily invested in a company that experiences long-term facility damage from the cold, you should be able to ride out the Polar Vortex without concern. Monitor the news for any updates specific to the stocks in your portfolio, watch the weather report, pour yourself a nice cup of something warm, and relax.

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