Thursday, November 19, 2015

Merrill Lynch on economic impact of El Niño: Q1 "Risk" to Upside

by Bill McBride on 11/19/2015 07:15:00 PM

Friday:
• At 10:00 AM ET, Regional and State Employment and Unemployment for October.

• At 11:00 AM, the Kansas City Fed manufacturing survey for November.

Merrill Lynch economists expect El Niño to boost economic activity a little in Q1. Here are a few excerpts from a research article by Michelle Meyer and Lisa Berlin of Merrill Lynch: Summer in Winter

While we are not complaining, it does not feel like we are in the middle of November, given the warm weather. ... According to the experts, this is partly a function of El Niño, which is a prolonged warming in Pacific Ocean surface temperatures. While we are not going to attempt to forecast the weather in the coming months (forecasting the economy is hard enough), it seems that there is a considerable risk of a warm winter. This would be a stark contrast to the last two years, with unusually harsh winter weather.

If we do enjoy a warm winter, the risk is that the 1Q economic data could surprise to the upside, particularly if expectations are for a slump akin to the last two years. We make the following arguments in this piece: 1) looking back at prior episodes of El Niño, GDP growth generally accelerated in 1Q. although the evidence is weak; 2) the seasonal adjustment process will be most sensitive to the most recent years, which suggests the seasonal factors will be looking for weakness, therefore, threatening to inflate the data; and 3) the BEA took steps to address the “residual seasonality” issue that has biased 1Q GDP lower over the prior few years, which may mitigate the negative effect.
...
[W]e think that if the winter ends up being warm, the risk is that the economic data look quite strong. This might just prompt the Fed to justify a second hike earlier than markets are expecting.