February Was a Bad-Weather Blip for the Economy, but Only Compared With January - Barron's

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Cold weather across parts of the country can be blamed for weak economic data in February. Here, the Texas Capitol in mid-February.

Montinique Monroe/Getty Images

At first glance, the latest batch of retail sales and industrial production data for February paint a discouraging picture of the U.S. economy at odds with the strong numbers in the latest jobs report. Look closer, however, and the figures reflect the impact of severe weather rather than any deterioration in the underlying economy.

Start with retail sales, where the headline is that consumer spending on goods and food services fell by 3% in February compared to January. There were declines in every single category except for gasoline stations and grocery stores. Exclude those categories—where nominal spending rose due to higher commodity prices rather than higher volumes—and household demand was down by 4%. That’s the worst monthly decline since April, by far.

But the drop in February looks bad only from the perspective of the exceptionally high level in January. The average American’s disposable income jumped more than 11% in that one month thanks to the disbursal of the $600 checks plus the revival of enhanced unemployment benefits. Unsurprisingly, retail and food services spending excluding grocery stories, gas stations, and bars and restaurants was up more than 8% in January compared to February. At the same time, the dramatic improvement in the health situation—and the restoration of outdoor dining in California—meant that spending at bars and restaurants was up more than 9%. Many categories saw even bigger increases in January, most notably department stores (up 21%), electronics and appliance stores (up 17%), and furniture stores (up 13%).

From that perspective, it’s neither surprising nor remarkable that February’s sales numbers were somewhat lower than in January. The more important point is that retail spending was still higher in February than at any point since before the pandemic began—and up by 4% from December 2020.

That suggests that the recovery in January wasn’t entirely a one-off, even if some gains were given back. Just as important, the reported drop in spending at bars in restaurants could have been a function of the bad weather and power cuts in Texas. Tellingly, while the daily data from OpenTable show that more Americans ate at restaurants in February than in January, there was a massive decline in the number of seated diners in Texas during the worst of the deep freeze.

The Census Bureau didn’t explicitly say that the weather explains the 2.5% monthly drop in food service sales—but it also says it doesn’t try to correct for the impact of the weather on the economic data. 

The weather effect is even clearer in the manufacturing data from the Federal Reserve. Again, the headline number is that manufacturing output fell more than 3%. But Fed economists, using a model developed during Hurricane Harvey, estimate that “the effects of the winter weather” account for most of the decline, such that manufacturing output would have dropped only 0.5% in the absence of the storms. If that had happened, manufacturing production would have been only 1% lower than its pre-pandemic level—and higher than in any other month since February 2020.

The 0.5% drop in manufacturing production that can’t be explained by the weather was largely attributable to the motor vehicle sector. Output for the industry was down more than 8% in February, and while some of that was due to the weather, the bigger problem was the ongoing shortage of microchips needed as inputs for modern cars and trucks. The result is that motor vehicle production in February was lower than at any point since June 2020. Before the pandemic, output hadn’t been that low on a sustained basis since 2014. Presumably, vehicle production will rebound once chip supply has been restored, especially because consumer demand remains robust. 

Other sectors of the industrial economy were also humming along nicely in February despite the bad weather, with the aerospace sector having its best month since January 2020 and the pharmaceutical sector having its best month since 2012.

All told, the latest figures are broadly consistent with an economy that continues to recovery from the pandemic. As vaccinations accelerate and more cash is distributed to households and businesses, we should expect even better numbers ahead.

Write to Matthew C. Klein at matthew.klein@barrons.com

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