These last few months have seen statistical effects distort reality in at least two ways.
One of them, I had already talked about in my article "Jobs Data Might Be A Statistical Mirage," regarding how the deep economic plunge back in 2008 could have distorted seasonal factors. This happened in such a way that, in the same months as the plunge occurred, these factors would be expecting more weakness than there really was. The seasonal factors would then overcompensate making seasonally corrected economic activity seem better than it really was.
But there was another effect. The 2011/2012 winter was incredibly mild - indeed, the fourth warmest on record, especially in the Northeast. This had several consequences:
- Heating was less necessary so there were considerable savings to be had in heating bills, as much as $250 per average household. This money went for other uses.
- At the same time, natural gas (UNG) was hit hard. While already being oversupplied, it saw heating demand fall due to the warm winter, and to top it off, this warm winter occurred mostly in the Northeast - where natural gas is used the most. This naturally made for a further plunge from already depressed levels, as well as the likelihood that this coming summer there won't be enough storage to handle all the natural gas from the filling season.
- With natural gas becoming incredibly cheap, coal (KOL) was sometimes displaced as the allocated power generation fuel, this made both for lower coal prices and lower power prices. Together with less heating demand, this had dire consequences for some power producers, with a notable victim being none other than Warren Buffett, through his investment in Energy Future Holdings' bonds.
- Gasoline (UGA) use fell sharply. With less pre-heating, less use of snow tires, less snow removal across the nation, less winter blends, all put together made for a substantial dip in gasoline use.
- Housing (XHB) construction was favored. A less harsh environment made it easier both for buyers and for construction companies, favoring home starts during the winter.
- On the whole, there were a lot fewer dismissals due to weather, to the point where most of January's job creation might be attributable to it. There were almost 220k fewer dismissals in January due to weather.
All in all, economic numbers were favored by more disposable income from a mild winter, and a less harsh environment leading to increased economic activity. However, much like with the seasonal effect described before, the favorable weather effect should dissipate in the coming months.
This means that the coming economic statistics will paint a more accurate picture of the economy than those from the months that have just gone by. Some of the economic optimism fueling the markets (SPY) might have thus been temporary in nature.