Bernanke's Link To "Mother Nature"
Yesterday, after I updated my economic and employment composites and discussed that they were pointing to weakening economic trends, a two mile wide tornado ripped through Oklahoma causing a massive amount of destruction. The video below is a 10x time-lapse video of what is potentially one of the worst tornadoes in modern history.
What does this tornado have to do with the economic analysis from yesterday? That is a very interesting question.
Over the last two years the economy has twice ground towards much slower rates of growth. Each time Bernanke would make the pitch that it was just an "economic soft patch" and that the economy would strengthen later on in the year. Each time he was correct. However, the reason by which he was correct is what is most interesting. I call it the "Mother Nature Effect."
If we take a look back at history you will see what I mean.
In early 2011 - Japan suffered a massive disaster of an earthquake and tsunami which devastated the country and shut down much of their production. This production break impacted the domestic economy causing weakness in economic growth. However, that issue was compounded by the "debt ceiling debate" in the summer which pushed consumers to the sideline as fears of a "debt default" swept the country. By the end of the summer economic growth had waxed rather sharply and the stock market had plunged nearly 20%.
As the Federal Reserve launched its second round of Quantitative Easing, which began the process of supporting asset prices, the strangest combination of events occurred to boost economic growth. First, Japan had struggled back onto its feet and began returning to manufacturing and production which in turned opened exports back up to the U.S. Pent up demand for products by the U.S. consumer boosted spending. Simultaneously, energy prices plunged providing a roughly $60 billion tax credit to consumers at the time which supported consumption even while wage growth weakened.
Then "Mother Nature" answered the call by providing Bernanke with the warmest winter on record in 65 years. This allowed construction and manufacturing to continue during a period of the year when much of the Northern part of the U.S. is "shut in" due to inclement weather. Lower needs for heating oil, and natural gas, led to a further massive tax credit for consumers which boosted consumption. The abnormally warm weather skewed the economic data higher due to the effect of the seasonal adjustments that are normally accounting for much colder weather. All in all - the boost to growth was quite substantial and came just when it was needed the most.
In 2012 we witnessed the same thing occur once again as the economy began to show signs of deterioration. As the effect of the seasonal data skews, due to the warmer than normal winter, faded and the "Fiscal Cliff" fears pushed consumers and businesses into a defensive posture the economy slid towards much slower growth. However, once again "Mother Nature" stepped in with "Hurricane Sandy" which rocked the North East. Congress responded with a $60 billion aid bill that led to a rush of economic activity of rebuilding homes, replacing flooded cars, fleets of taxis, and funded the repair of massive amounts of infrastructure. However, that effect faded quickly as life returned to normal in a very short period of time.
As I watched the news last night, and started to assess the damage caused by the numerous tornadoes in the Mid-West including the "super twister" shown above, it occurred to me that once again we are witnessing "Mother Nature" answer Bernanke's "economic soft-patch" call.
The chart below is my Manufacturing Composite Index. It is a derivative of the EOCI index discussed yesterday except it strips out the Leading Economic Indicators to focus solely on the broad nationwide manufacturing activity. You can see the ebb and flow of activity as it was affected by "Mother Nature."
This, of course, is the "broken window" theory in action, and while in the long term "smashing windows" does not promote sustainable organic growth, it does provide short term bursts of economic activity.
Note: The "broken window" theory suggests that if a window is broken it must be repaired creating economic opportunity for the person repairing the window who then uses the compensation for the repair to buy shoes which creates economic recovery. However, the fallacy of that theory is that you are replacing things which were already purchased and therefore capital that would be used for future purchases is being diverted into replacement of something which was already paid for.
The chart below is a close up of the Economic Output Composite Index (EOCI) that I discussed yesterday. I have added (dashed black line) the potential impact from the forthcoming surge in activity from the rebuilding of the destruction from the recent tornado's. This is strictly an assumption at this point as while the damage was significant it will be far lower than what we saw from "Hurricane Sandy."
While I knew that the Federal Reserve wielded significant power - I didn't realize that the position of Chairman came with a direct line to "Mother Nature." Maybe there is more than just conspiracy theories when it comes to government experiments to control the weather?
I jest, of course, but what is relevant is that the effect of "Mother Nature" has provided the short term boosts to economic growth which kept a struggling economy above the water line. How many more natural disasters will come to offset the negative economic impact of a zero interest rate environment coupled with a wave of deflationary pressures is unknown. However, you do have to admit that the "Mother Nature" effect is quite interesting nonetheless and wonder, if even for just a moment, if Bernanke has her on speed dial.