The cold wave severely impacts the U.S. economy! Bank of America: It will lower GDP by 0.5-1.5 percentage points

Although the impact of the winter storm "Fern" has largely dissipated, the "scars" it left on the U.S. macroeconomy may just be beginning to show.

Bank of America, in its latest research report, stated that by comparing historical data from the winter storm "Viola" in 2021, it quantified the potential impact of extreme weather on first-quarter GDP, estimating a possible decline in GDP growth of 0.5 to 1.5 percentage points.

The report pointed out that, according to the assessment by the bank's chief economist Bhave, the scope and severity of this cold wave have directly suppressed consumer spending in the short term. An analysis model based on the bank's aggregated credit and debit card data shows that similar-scale weather disasters in the past have led to significant reversals in weekly total credit card spending, and this trend is re-emerging in the current economic data.

If calculated under the most pessimistic scenario, where GDP growth is damaged by 1.5%, considering that market strategists previously had a general expectation of first-quarter economic growth of only about 1.5%-2%, this means that under the impact of extreme weather, the U.S. economy may face the risk of stagnation in growth in the first quarter.

Learning from History: The Collapse of Credit Card Data

To assess the destructive power of this storm, Bank of America reviewed the storm "Viola," which swept through half of the country in February 2021. By analyzing the aggregated credit and debit card data from Bank of America, Bhave found that the impact of extreme weather on consumer spending was immediate.

"In the week ending February 19, 2021, total credit card spending fell by 3.7% year-on-year, while the trend in the previous weeks was about a 6% year-on-year increase."

After excluding seasonal factors and subsequent spending rebounds, Bank of America estimated that "Viola" caused a spending loss of at least 0.6% within a month, which directly dragged down GDP growth by about 0.5 percentage points in the first quarter of 2021.

Hidden Losses: Cash Transactions and GDP Drag

Bank of America also specifically pointed out that credit card data may underestimate the actual economic losses.

The report noted that cash transactions are often hit harder than electronic payments during severe weather, and other components of GDP may also be affected. Considering these factors, Bank of America believes that "Viola" may have actually dragged down GDP by as much as 1.5%.

This means that if the market consensus expects first-quarter growth to be between 1.5% and 2%, then a severe winter storm is enough to push the U.S. economy into stagnation for that quarter.

"Fern" vs. "Viola": Which is More Destructive?

The report pointed out that although the two storms are not entirely the same, their economic consequences are similarly dire. "Viola" severely impacted the southern region, leading to a long-term power outage in Texas; while "Fern," although less damaging to the power grid, directly struck the wealthier northeastern region.

"Fern caused more snowfall in the Northeast, which is home to more high-income households. Therefore, it remains unclear whether the economic losses caused by Fern will be greater or less than those caused by Viola." Based on the above analysis, Bank of America has provided the final loss estimate: The impact of this winter storm on first-quarter GDP growth will be between 0.5% and 1.5%.

However, the good news is that the bank does not believe this will have a lasting impact on the economic trajectory, and the upside potential for second-quarter GDP growth will be comparable to the downside potential in the first quarter, indicating that economic activity will see a strong rebound thereafter.

"The upside potential for second-quarter GDP growth is as large as the downside potential in the first quarter."