ECONOMY: HURRICANES IMPACT DATA, BUT EXPANSION APPEARS INTACT
Economic reports released in September 2017, which mostly reflect economic activity in August but also include some weekly data and preliminary reports for September, were already showing the impact of three powerful hurricanes that hit Texas, Florida, Louisiana, and Puerto Rico in August and September. The economic impact of these events was significant, but the impact on everyday lives as these regions start to recover and build, is difficult to capture.
Typically, weather events of this scale have an initial negative impact on economic data due to the destructive impact of the storms and the disruption of regional commerce. But regional events also can have a national impact due to the regional concentration of key industries or agricultural products (oil refineries, oranges) and the disruption of transportation networks. The economic data often pick up as regions begin to recover and rebuild, creating increased demand for goods and services. In addition to missing the human toll, economic data also typically miss the cost of destroyed property, which isn’t reflected in current activity, and the need to reallocate resources to replace it that might have been put to more productive use elsewhere.
While the September reports were generally weaker than reports in August, we believe the change mostly reflects the impact of the hurricanes, with no real indication, in our view, that the overall course of the economy has changed. Economists’ estimates of economic data pre-release were generally well calibrated with actual data, indicating minimal unexpected shocks outside of the hurricanes. Over the course of September, the Citi Economic Surprise Index, an aggregate of standardized economic surprises, rose from -23 to -8. (Zero represents surprises that were completely in line with expectations. We generally consider expectations to be in line with data when the index reads between +25 and -25.) Of the 95 economic data points tracked by Bloomberg for which they have economic estimates, 45 came in above expectation and 50 below expectation, with the median negative surprise slightly larger, again indicating that average expectations were about right.
The immediate impact of the hurricanes already stood out in some reports. New claims for unemployment, which is released weekly, jumped noticeably from an average of 247,000 in the prior year (and 235,000 at the end of August) to 298,000 for the first week in September. The number declined later in the month, but remained elevated. While not as dramatic, industrial production for August also started to show the impact of Harvey, posting its largest monthly decline since the Great Recession. The Federal Reserve (Fed), which provides the data, estimated that of the 0.9% decline, about 0.75% could be attributed to the storms.
The impact was also readily apparent in lowered expectations for third quarter real gross domestic product (GDP) growth, which will be released on October 27. Economists’ estimates for real economic growth have generally come down 0.4–0.8% in September. (This range is based on a review of changes in individual forecasts—broad forecast averages may not be updated frequently enough to reflect the impact of the hurricanes.) We have seen similar adjustments in the New York and Atlanta Fed’s NowCast models. The New York Fed model’s estimate for third quarter growth fell 0.7% between September 1 and September 29, and now indicates forecasted growth of 1.5%, while the Atlanta Fed’s model declined 0.9% to forecasted growth of 2.3%. Note that these models are purely data driven and reflect the economic shock from the hurricanes as already expressed in recent data; the changes do not directly reflect economists’ judgment.
Growth estimates have declined across economic sectors in the Atlanta Fed’s Nowcast model except for inventories, which may see a temporary increase due to an unexpected decline in demand and the inability of finished goods to make it to market, and net exports, which have been helped by a weaker dollar independent of weather events, but may also get some support from disruptions in production of some U.S. goods. Anything between about 2.0 and 2.5% growth in the third quarter would generally fall within the expected range and would not be considered a disruption in the current run rate of economic growth after adjusting for the initial negative impact of the hurricanes.
There was also some positive economic news in September. Leading indicators, as aggregated in the Conference Board’s Leading Economic Index, advanced at an accelerated pace year over year in August, indicating below historical odds of a recession in the next 12–18 months. Several measures of regional manufacturing activity surprised to the upside, building permits for August rose, and some measures of inflation ticked up (while still remaining stubbornly below the Fed’s 2% target). The impact of the hurricanes will likely continue to be felt in October’s data releases, making it more difficult to gauge the health of the overall economy, but the broader signs point to continued expansion.
The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies.
This research material has been prepared by LPL Financial LLC
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