Although the immediate impact of Winter Storm Fern has largely subsided, the macroeconomic scars it inflicted on the United States may only just be beginning to surface.
Bank of America, in its latest research report, quantified the potential impact of extreme weather on first-quarter GDP by comparing it with historical data from the 2021 Winter Storm Viola. The bank estimates this could lead to a reduction in first-quarter GDP growth of 0.5 to 1.5 percentage points.
The report notes that, according to an assessment by the bank's Chief Economist Bhave, the scope and severity of this cold snap have directly imposed a short-term suppression on consumer spending. Analysis based on the bank's aggregated credit and debit card data model indicates that weather disasters of a similar scale have previously caused a sharp reversal in total weekly credit card spending, a trend that is re-emerging in current economic data.
Under the most pessimistic scenario, where GDP growth is impaired by 1.5%, and considering that market strategists' consensus expectations for first-quarter economic growth were only around 1.5%-2%, this implies that U.S. economic growth in the first quarter could risk stalling due to the extreme weather impact.
Learning from History: The Plunge in Card Data To assess the destructive power of the current storm, Bank of America looked back at Storm Viola, which swept across half of the U.S. in February 2021. By analyzing Bank of America's aggregated credit and debit card data, Bhave found that the impact of extreme weather on consumer spending is immediate.
"In the week ending February 19, 2021, total credit card spending fell by 3.7% year-over-year, whereas the trend in prior weeks was approximately 6% year-over-year growth."
After adjusting for seasonal factors and subsequent spending rebounds, Bank of America estimates that "Viola" caused a spending loss of at least 0.6% over one month, directly dragging down Q1 2021 GDP growth by approximately 0.5 percentage points.
The Hidden Loss: Cash Transactions and GDP Drag Bank of America also specifically pointed out that card data might underestimate the actual economic losses.
The report states that cash transactions often suffer more severely than electronic payments during severe weather, and other components of GDP are also affected. Taking these factors into comprehensive consideration, the bank believes the actual drag on GDP from "Viola" at the time could have been as high as 1.5%.
This means that if the market consensus expects growth between 1.5%-2% for the quarter, a severe winter storm could be enough to push the U.S. economy into stagnation for that period.
"Fern" vs. "Viola": Which Was More Destructive? The report indicates that while the two storms are not identical, their economic consequences converge. "Viola" severely impacted southern states, causing prolonged power grid failures in Texas; whereas "Fern," while causing less damage to power grids, struck the wealthier Northeast more directly.
"Fern brought more snowfall to the Northeast, a region with a higher concentration of high-income households. Therefore, it remains unclear whether the economic losses from Fern will be greater or lesser than those from Viola."
Based on this analysis, Bank of America provided its final loss estimate: the drag on first-quarter GDP growth from this winter storm will be between 0.5% and 1.5%.
However, the good news is that the bank does not believe this will have a lasting impact on the economic trajectory. The upside potential for second-quarter GDP growth is seen as being just as large as the first quarter's downside, suggesting a strong rebound in economic activity is likely to follow.
"The upside for Q2 GDP growth is just as large as the downside for Q1."