'The weather' is only a good excuse when its not an excuse

CEOs, investors, and economists love to blame the weather.

Here’s a short sample of excuses from the last several quarters alone:

  • Bank of America Merrill Lynch said that the warmer-than-average October probably negatively impacted the month’s retail sales. (October 2015)
  • Macy’s CFO said there had been weak interest in the company’s fall apparel due to warm weather. (November 2015)
  • Dick’s Sporting Goods CEO said slowing sales could be attributed to “funky weather.” (November 2015)
  • High Street retailer NEXT said “unusually warm weather in November and December” led to a “disappointing” holiday season. (January 2016)

The basic thinking here is that unseasonably warm or cold weather alters the way Americans shop. This makes sense, to a certain extent: if it’s 80 degrees outside, you might not exactly be in the market for a parka.

But the cynical read here is that companies and economists use “the weather” as an excuse for other, real problems with their business and/or the economy. Perhaps, our hypothetical American shopper didn’t buy a certain winter coat at a given department store because they bought it on Amazon or because the department store looked chaotic or because wage growth has remained low since the Great Recession — not because of the weather.

F0r what it’s worth, back in January, Bank of America Merrill Lynch economist Michelle Meyer, noted that her team found “little evidence of a weather effect on total sales.”

She plotted the deviation for total retail sales excluding cars for the month of December over the past 25 years against the same measure for temperatures over that same time period and found no correlation.

However, despite the fact that everyone blames the weather in what feels like every earnings call, folks fall silent when it comes to effects from the weather that could actually change things up, such as La Niña and El Niño.

“La Niña episodes can have an outsized economic and financial impact. … Yet surprisingly little about evolving weather developments finds its way into the business or popular media until after the fact,” observed a Deutsche Bank team led by strategist John Tierney in a note.

“And historical evidence suggests that investors can be slow to price in weather patterns until things are fairly far along. A key reason is that most people simply do not understand the underlying weather drivers.”

For those unfamiliar, La Niña is characterized by powerful monsoons that could flood low-lying areas, while El Niño comes with unusually dry weather. And, n

otably, the National Oceanic Administration Agency confirmed that La Niña is coming.

Here’s Deutsche Bank again:

“Given the many far-reaching implications, investors should pay closer attention to the potential flipping of the weather conditions from El Niño to La Niña in the near future. A moderate La Niña will benefit Southeast Asia and Australia by bringing an end to the prevailing drought conditions and improve the production of agricultural commodities such as rich and palm oil. In contrast, a very powerful La Niña event would cause widespread destructive flooding, offsetting the benefits of more rain in the region.”

As Business Insider’s Akin Oyedele noted earlier, one area in particular that Deutsche Bank is keeping its eyes on this time around are Asian currency markets.

Importantly, although these weather events hit the equatorial Pacific particularly hard, they could also have ramifications on other economies given increased global integration — including in the US.

For example, back in 2011, heavy rains and flooding forced many factories in Thailand — a major hub for hard disk drives — to close down.

That led worldwide hard drive production to drop by 28% and the production of notebooks, digital video recorders, and other devices to stall. Intel’s profits fell by $1 billion in Q4 2011, according to data cited by Citi Research in 2014. And the total estimated losses attributed to the floods were $45.7 billion, according to Citi.

That seems like an more appropriate time to blame the weather.

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