When we say, "It's raining," what does the "it's" refer to?

Nothing. "It's raining" is an idiomatic expression. Idiom: a group of words established by usage and having a meaning not deductible from those of the original words.

It's often used to answer the question:

"How's the weather?"

The "it" in that case would be the weather.

Last I checked "it's" referred to "It is"

Around here, as dry as it is, we don't mention rain at all, unless it's to say "I wish we'd get some d-----d rain!"

When you say "its raining" you are refering to the sky, ie the sky is raining.

"The weather is raining."
"The sky is raining."

No, neither quite does the job right, does it? We would be more likely to say 'the weather is rainy', or 'rain falls from the sky'.

"It's raining" is an idiomatic expression. An idiomatic expression is a group of words established by usage and having a meaning not deductible from those of the original words.

"It's raining" could be expressed unidiomatically by 'Rain is falling'. That is correct but not colloquial. So we just say what everyone else says based on a language custom.

Other example: "She's the best cook, hands down!" What hands? Her own hands? How could she cook with her hands down? Would she be disqualified if she raised her hands at some point during the cooking process? All who raised their hands put them down now?

No, it doesn't matter whose hands, because it's 'just an expression'.

Weather lore is full of idioms. "How is the weather?" "How" is used to ask 'in what way?'.

'It's always cold here.'

There's a structure called 'the impersonal it' that is used in these idioms. Other examples:

"How far is it to New York?" (How far is WHAT to New York?)

"Who is it?" "It's Mary."

In French and Italian, forms of the verb 'to make' are used for the purpose.
"How are you?"
"Je fait bien" (Means "I am fine", literally "I make well". Make what? Doesn't matter. It's an idiom.)

"How's the weather?"
"Fa bel tempo." (Means "Beautiful"), but literally "It makes beautiful time." Another idiom.)

Thank you, Babthrower. I don't know that there's any definitive answer to this question, but I'll throw my pins in with Displaced: the "It's" refers to the sky, or the nearest cloud.

Catty (who has a whole closet full of useless facts)