Sunday, January 15, 2012

Mild Winter, a Lucky Break for the Economy

It is cold this morning in southern Pennsylvania. It is only the third cold snap of the winter with temperatures dipping below average, so it seems as if winter is just getting started. Yet it is the middle of January and winter could be winding down one month from now.

It is a similar story across North America and Europe. In a normal season, temperatures would be below average about half of the time and above average about half of the time, but we have seen temperatures mostly above average. Part of the reason for the mild winter weather is the Arctic Oscillation, a wind pattern that this winter is keeping the coldest air locked up over the Arctic Ocean.

With the mild winter, my heating costs have been one third less than in an average winter. This effect may help to explain the recent consumer confidence numbers. People lately are feeling more confident about economic matters than they were all last year. People on average overspent slightly on Black Friday, but were saved by an unusually small heating bill a month later. For some households in greater financial stress, saving $1,000 on heating may allow them to catch up on mortgage payments. That is the kind of saving grace that can persuade people there is a chance that everything is going to work out fine.

And this is not just a matter of perception. The surplus in local government budgets, after a winter of little or no snow removal, may forestall some of the layoffs that seemed inevitable just one month ago. Personally, as I spend less time on snow removal and travel delays, I can spend more time on research and development, and it is a similar story with others taking a chance to get a head start on this year’s work. If more people pay their mortgages on time this winter, it leads to fewer evictions next year. These are real and substantial economic effects.

The economic effects of the mild weather will help to restrain oil prices. World oil prices have been hovering near $100, and U.S. gasoline prices well below $4, only because of the light demand for energy for heating. The reduction in imports gives the national economy some breathing room. Economic expansions are built on this kind of event. Of course, bad news next month could easily reverse this month’s gains. But if more lucky breaks follow, economic progress is inevitable.