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Cold Winter Could Put U.S. Economy on Ice Saturday January 20, 1:46 PM EST By Daniel Sternoff NEW YORK (Reuters) - When it rains, it pours.

And snow, sleet and one of the coldest U.S. winters on record are sending bitter shivers through an already cooling economy, potentially putting a decade-long expansion on ice.

Economists say higher heating bills, shorter work weeks and dampened drive to hit the malls are all depressing consumer spending this winter. Bad weather is also sending chill winds through the so-far resilient housing and construction sectors.

The colder- and wetter-than-usual weather is exaggerating a usual winter fall off in retail and building activity just as a clutch of prominent Wall Street analysts are forecasting an abrupt end to record-long economic boom.

And this winter's impact on the economy may be all the more biting as the cold snap follows a string of the warmest winters in more than a century, warping government adjustments used to smooth out usual seasonal distortions in economic data.

"Unusually cold weather is one big reason why we think the U.S. economy will suffer a modest setback in real GDP (gross domestic product) this quarter," said Ed McKelvey, senior economist at Goldman Sachs, in a research note.

Goldman Sachs is predicting the U.S. economy will contract by an annual rate of 0.3 percent in the first quarter.

UBS Warburg economist Susan Hering said high demand for heat after a long run-up in energy costs was taking a toll on consumer spending. Households are now forced to allocate some 4.7 percent of their after-tax incomes -- 0.5 percent more than a year ago -- on heat and fuel.

"Consumers spent some $50 billion more on energy from late 1999. That means other consumption is going to have to fall by that amount. And we have of course seen retail sales crash," she said.

And with the worst heating bills so far this season yet to hit consumers' mailboxes, she said the worst spending figures were yet to come.

And while the government Thursday said single-family housing starts were resilient in December, primarily due to low mortgage rates, multi-unit home starts and building permits, a harbinger of future activity, sank sharply.

The National Association of Home Builders housing market index in January tumbled to its lowest level in four years, due in part to abysmal weather.

SEASONALLY-ADJUSTED RECESSION?

While the weather is having a real impact on economic activity, this year's odd swing from surprisingly warm to extremely cold winter temperatures is making seasonally adjusted data appear weaker than underlying conditions.

Think of it as the statistical equivalent of a wind chill factor that makes a bracing cold feel even more bitter.

"Seasonal factors are based on the average of the last five years, with the heaviest weight going to the last three years. When you have a string of milder than normal winters, seasonal factors get smaller," said Joseph Abate, senior economist at Lehman Brothers.

"The impression is that some of the recent data was biased lower by the abysmal weather conditions."

So should weather-distorted data contribute to two consecutive quarters of economic contraction followed by a snap back in the second half of the year, it could turn out to be the first seasonally-adjusted U.S. recession on record.

While Goldman Sachs' McKelvey said that, while seasonal adjustment methodologies made even economists' eyes glaze over, they just may spell the difference between an economy that is growing or shrinking.

DON'T SHOOT THE WEATHERMAN

He said construction activity in the first quarter could look about 2 percent weaker than it would with more "normal" seasonal adjustments and retail sales data could appear 1.5 percent below the mark. That in turn translates into a 1.25 percent drag on overall economic growth.

"Real GDP growth in the first quarter is apt to suffer measurably from the mere fact we are having an unusually cold winter," McKelvey said.

Lehman's Abate said a weather-induced 1 percent drag on GDP was "plausible", but suggested that distraught stock market investors should not blame the weatherman for their woes.

"There is a weather impact of uncertain magnitude, but I would caution about interpreting too much of a slowdown to just the weather. There is genuine fundamental weakness in the economy," Abate said.

Finding a silver lining on the gathering storm clouds, McKelvey noted that economic activity depressed by unseasonably cold weather tends to spring back strongly once the nation thaws out.

But he cautioned: "Although the possibility always exists that the impression of weakness could have a self-fulfilling effect on consumers' and businesses' attitudes."

http://money.iwon.com/jsp/nw/nwdt_rt_top.jsp?cat=TOPBIZ&src=202§ion=news&news_id=reu-91856&date=20010120&alias=/alias/money/cm/nw

-- Martin Thompson (mthom1927@aol.com), January 20, 2001