The Economic Effect of the American Deep Freeze

In the beginning of 2019, America has been hit by a weather phenomenon known as the Polar Vortex. This phenomenon has brought chilly winds and freezing temperatures to the United States. In many parts of the country like Chicago, the temperatures have hit historic lows and were close to -50 degrees! The daily life of the people in these regions has definitely been affected. Since these storms will have a major impact on the New England as well as Midwestern regions of the United States, many analysts are predicting that the impact on the economy will also be severe.

In this article, we will have a closer look at some of the economic impacts that have resulted from the Great American Deep Freeze.

Recession or Not

For the past few days, the economic activity in about 11 of the 50 American states has been brought to a complete standstill. This has triggered fears that the weather could lead to a dip in economic activity thereby sparking a recession.

Economic experts have dismissed these concerns as irrational fear mongering. This is because the polar vortex is a temporary event which will have a temporary effect on the economy. Unless the bad weather continues for very long, this event will just be a small blip. The total economic impact of the polar vortex is expected to cost the United States economy around $5 billion dollars. This does seem like a big number. However, when one compares it to the $15 trillion size of the United States economy, the number sounds immaterial.

Hence, the bottom line is that the economy as a whole is unlikely to face too many negative effects. However, that does not mean that individual sectors cannot be winners or losers. There are some industries which will obviously gain from these adverse weather conditions whereas on the other hand there are also many obvious losers.

Effect on Utility Stocks: The polar vortex is going to turn out to be a boon for the utility stocks. This is because as the temperatures fall to historic lows, people will need more energy in order to keep their homes heated and well lit. As people consume more energy, companies can charge a higher price per unit as well. This is the reason why the high energy usage by citizens will significantly raise the revenue of the American utility companies. Other services such as Netflix and cable services will also benefit from the adverse weather. As more people stay home, they will consume more of these services leading to increased revenue for these service providers as well.

Effect on Retail Stocks: The retail sector will largely be neutral to the effects of the polar vortex. This is because since retail involves moving out of the house and indulging in discretionary spending, people are less likely to spend money on these goods during the storm. However, it also needs to be noted that a large number of jackets, mittens and other woolen clothes were purchased in preparation for this storm. As a result, the negative effects have been nullified by the positive effects leaving the sector totally unaffected. The retailers have been lucky that this storm did not happen during the Christmas period. If this storm had happened in December, the weather disruption would have severely curtailed holiday spending and hence would have aggravated the financial loss.

The restaurant industry is also considered to be a part of the retail industry. However, they have been severely affected since the number of people eating out or delivering food has suddenly gone to zero!

Effect on Energy Stocks: The United States has a bustling energy industry. The country has now become one of the largest producers of oil thanks to companies which use the fracking method. A lot of these companies which produce oil operate in the Midwestern region. Hence, the weather has severely curtailed their activity. The production of oil has come down to zero in many of these companies. As a result, there is a shortage of oil which has raised prices and is impacting other industries as well. The refining of oil has also been hit since that is not undertaken in temperature controlled environments either. The energy industry is capable of increasing production once the weather resumes to normal. This will help them mitigate the loss.

Effect on Travel and Tourism Stocks: The travel and tourism industry is amongst the worst hit in the country. This is because airlines have to absorb all the costs of stranded planes. These planes are not generating any revenue. On top of that, airlines have to pay for airports in order to park the planes. Also, many airlines have stranded passengers. These airlines are supposed to pay the hotel costs of these stranded passengers as well which is increasing the losses.

Ever since the announcement of the storm came in, all tourist activities in the mid-western region have been canceled. Obviously, this is a big loss to the economy which will be difficult to recover from.

The bottom line is that the economy as a whole will remain largely unaffected. However, specific components of the economy will gain at the expense of others. This is because the spending pattern of individuals completely changes when they are stuck in the middle of a storm.