So much depends on the weather

INDICATOR: January Supply Managers' Manufacturing Survey

KEY DATA: ISM (Manufacturing): 51.3 (-5.2 points); Orders: 51.2 (-13.2 points); Production: 54.8 (-6.9 points) NOTE: Over 50 means growing

IN A NUTSHELL: "If I have to choose which of these two explanation, a collapse in the economy or the logical result of the polar vortex, that best explains the cratering of orders in January, I'll take the weather."

WHAT IT MEANS: The manufacturing sector pulled back sharply, orders collapsed and production cratered. I guess the sky is falling. NOT! When something looks awfully strange, go with the explanation that might explain the oddity, don't simply round up the usual suspects. The Institute for Supply Management's January survey showed a huge drop in new orders, but it was not matched by similarly large declines in any of the other components of the index. The only one that came close was production. Export and import orders moderated minimally. Keep in mind, despite the double-digit decline in demand, new orders (and production) were still increasing, just at a much slower pace. So, why would the ISM's new orders index crater by the largest amount in thirty-three years? Why would it decline even more than when the world financial system nearly collapsed? Why would it drop faster than when job losses exceeded 700,000 in a month? It didn't even drop this much after 9/11! The last time it went down more was December 1980, right after Reagan was elected and Paul Volcker decided that the new president would enjoy a 20% funds rate. Either we are now in a depression or something else has to have been going on. How about weather that made businesses activity impossible? I vote for that. Meanwhile, employment continued to expand, though more slowly. If firms were hiring despite collapsing orders, do you think they think the sky actually fell? The only component that went from expanding to contracting was backlogs.

The economy had some momentum going into this year as construction rose in December despite cut backs in public sector activity. As we saw in the fourth quarter GDP report, the government took nearly one full percentage point out of growth and the cut backs hurt businesses in a variety of industries. Shhh, don't tell that to Congress.

MARKETS AND FED POLICY IMPLICATIONS: This report undoubtedly shocked a lot of investors, at least those who either don't read any economists' commentaries or think we have no idea what we are talking about (that might not be far from the truth!). It should not have. I have been writing for a couple of weeks that January's data are going to be bad and confusing because of the weather. That order books thinned is hardly a surprise. That production slowed sharply, also made total sense. That hiring continued is probably the best indicator that this report was weather driven. But it is a warning that the January numbers could be a lot uglier than any of us thought. Friday we get the January jobs report and if you have any idea what that will look like, tell me so we both know. So, Janet Yellen takes over exactly when the economic data stop indicating anything about the fundamental shape of the economy. I guess no good deed goes unpunished.