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Blame Harvey and Irma
Simply Economics - September 15, 2017
By Mark Pender, Senior Editor



Hurricanes are already causing swells and depressions in economic data and these are just the initial effects. The forecast calls for increasing volatility as well as temporary declines for production and consumption together with an upsurge in energy prices. The week's stormy run includes industrial production, retail sales, and also the headliner – core inflation.


The economy

Hurricanes aside, this year's concern has been weakness in inflation that ultimately points to weakness in demand. But the latest news is the best in 6 months. Core inflation, which excludes food and most significantly energy, rose 0.2 percent with total prices, including a spike for gasoline, up 0.4 percent. Housing costs are back up with a 0.4 percent gain as rents held firm and hotels swung higher. Wireless prices dipped only marginally which also helped August relative to earlier months.


Annual rates are still below the 2 percent target but here too there's improvement. Total prices, again lifted by energy, rose 2 tenths to 1.9 percent while core prices, at 1.7 percent, have at least stabilized. Rising gas prices tied to Harvey and also Irma may well lift total prices over the golden line with spillover into wider prices promising a delayed lift for the core as well. This improvement is critical for the FOMC which will decide in the coming week whether to begin tapering down their bond holdings.


But hurricane swings will even out over the coming months, not providing the permanent punch that prices need. The graph separates services, where price variation is limited, and commodities where variation is routine. Here there's more good news as service prices rose 0.3 percent for the best result since February. Financial services, physician services, recreation services and auto insurance all gained as did delivery services which is one area that may in fact be getting a one-time lift.


And energy does have an effect on overall prices. Anyone who remembers the gas lines and double-digit inflation of the 1970s can confirm this. Looking back at 2014, oil fell in half from $100 which raises the question whether this collapse is central to why inflation is still so subdued. The red line tracks the energy index of the producer price report against the magnfied index for total producer prices. Total prices shifted lower as energy buckled in 2014 but have resumed their climb as energy has firmed.


Core inflation is a nice surprise but not a dramatic one. One of the week's extreme results is a 0.9 percent plunge for industrial production which showed wide effects despite Harvey's late month slam on August 25. All three components dipped: utilities down 5.5 percent on Harvey outages; mining down 0.8 percent on lower energy output; and manufacturing down 0.3 percent on declines in machinery and nondurables despite a rare rise for vehicles that followed three straight declines.


The gain for vehicle production is hopefully the start of a trend. Vehicle sales took a hit after Harvey (as we shall see shortly) but replacement demand in the wake of the hurricanes, along with pent-up demand following this year's weakness in sales, could begin to fire production back up. Vehicle production fell 7.1 percent from April to July before popping 2.2 percent higher in August. Production has been showing limited life this year and a vehicle rebound could help  factories gain traction.


Harvey also hit the consumption side of the economy as retail sales fell 0.2 percent in August due to a steep 1.6 percent drop in vehicle sales, one tied at least in part to Houston flooding. The report also included a sharp downward revision to July which together with August have cut the outlook for third-quarter consumer spending. Excluding autos, retail sales managed a limited 0.2 percent gain but when excluding both autos and gas, where sales spiked on higher pump prices, retail sales fell 0.1 percent.


The ex-auto ex-gas core of retail sales has been showing declining strength for the past year, posting two monthly declines in the last three months with the year-on-year rate moving from plus 4 percent in January to 3.2 percent in August. Clothing has had a bad year as have health & personal care stores while electronics & appliances have been in outright contraction. The plus side includes building materials and especially nonstore retailers where gains, due to e-commerce, are nearly in the double digits.


Strength is the clear signal from confidence measures including consumer sentiment. The index for preliminary September did fall but not much, to 95.3 from 96.8 in August. Hurricane Katrina in 2005 had a far bigger initial impact, at more than 12 points, than Harvey and Irma put together. Confidence in personal finances is the best of the expansion, belying wage weakness but consistent with strength in home prices and the stock market and especially with full employment.


Big storm effects have come from where it was expected most, in initial jobless claims. Claims actually fell back 14,000 in the September 9 week following the prior week's 62,000 post-Harvey spike. Texas was responsible for the prior week as claims soared 50,000 above normal to nearly 64,000. Yet in the subsequent September 9 week, Texas claims came in at 52,000 which perhaps hints that the worst has passed, at least for Harvey. Irma's impact on Puerto Rico, Georgia and Florida are pending.


The hurricane impact on payrolls is likewise pending. Employment reports are sampled at mid-month and the August report had no effects. But September's report will include the combined punch of both Harvey and Irma. What we do know is that labor demand was robust going into the pair. JOLTS data show a 0.9 percent July jump in job openings to 6.170 million. But hiring, also up but much lower at 5.501 million, indicates that employers still can't fill the jobs fast enough.


One area where hurricane effects are clear is gasoline inventories. Texas makes up nearly 1/3 of U.S. refinery capacity with much of this disrupted by Harvey, forcing suppliers to draw down inventories. Gasoline inventories fell 8 million barrels in the September 8 week to 218 million which followed a 3 million draw in the prior week. Wholesale prices have moved from $1.51 per gallon before Harvey to $1.62, a 7 percent gain that compares with a 12 percent rise to $2.64 at the retail level.


Markets: Is tapering already priced in?

For the markets, Treasuries were in action as demand shrunk after the rise in the core CPI. The 2-year yield shot up 13 basis points to 1.38 percent in a giant move that points to new expectations for more aggressive withdrawal of FOMC stimulus. The 10-year yield, at 2.20 percent, rose 14 basis points which is a fair chunk of the 25 to 50 point response that many had guessed would be the total effect of tapering. Once tapering starts, the Fed is seen roughly halving its $2.5 trillion in Treasury holdings over time.


Treasury selling points to expectations for rising interest rates and expanding economic growth. This is what the stock market has been telling us all year as indexes posted another series of record closes. The Dow, at 22,268, jumped 2.2 percent in the week for a yearly gain of 12.7 percent. Oil also had a good week, up 5 percent and testing resistance at $50. Gold didn't have such a good week, falling 2.0 percent to $1,324 with the yearly gain, however, still a very impressive 15.0 percent.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 8-Sep-17 15-Sep-17 Change Change
DJIA 19,762.60 21,797.79 22,268.34 12.7% 2.2%
S&P 500 2,238.83 2,461.43 2,500.23 11.7% 1.6%
Nasdaq Composite 5,383.12 6,360.19 6,448.47 19.8% 1.4%
Crude Oil, WTI ($/barrel) $53.71 $47.53 $49.90 -7.1% 5.0%
Gold (COMEX) ($/ounce) $1,152.50 $1,352.60 $1,324.90 15.0% -2.0%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.25% 1.38% 17 bp 13 bp
10-Year Treasury Yield 2.45% 2.06% 2.20% –25 bp 14 bp
Dollar Index 102.26 91.32 91.78 -10.2% 0.5%


The bottom line

It's hurricane conditions for economic data, which is no exaggeration. It's hard to get a grasp on the effects of Harvey and Irma but the initial indications point to wide dislocations for production as well as consumption. Resulting price pressures would be welcome but are likely to be confined to no more than a swing higher followed by a swing lower for consumer energy prices. In any case, all data are now subject to extreme revisions which are another uncertainty that FOMC policy makers will have to weigh. One thing that is certain is that strength in third-quarter GDP, especially given the trouble for retail sales, is at risk. Will this be enough for the FOMC to pass on balance-sheet unwinding at this month's meeting? The answer could very well be yes it if wasn't, that is, for the recovery in the core CPI.


Week of September 18 to September 22

The week will be dominated by Wednesday's FOMC announcement, quarterly forecasts and Yellen press conference. Rate action isn't in play at the meeting but the beginning of balance-sheet tapering definitely is. Housing will be the week's data theme with the housing market index on Monday expected to show September hurricane effects though starts & permits on Tuesday are not expected to show significant August effects. Existing home sales for August start off Wednesday's action and effects from Harvey are possible while home prices, where strength has been underpinning consumer confidence, will get attention on Thursday with the FHFA housing price index where strength is the call. Also out on Thursday will be initial jobless claims and Hurricane Irma's hit on Florida is expected to inflate the headline. Also out Thursday will be the Philly Fed manufacturing report and the latest hurricane update on delivery delays and price increases followed on Friday by Markit Economics' sweep of September flashes that, however, aren't expected to show much hurricane effects at all.




Housing Market Index for September

Consensus Forecast: 65

Consensus Range: 53 to 68


Hurricanes are expected to hit the housing market index which forecasters see falling a sharp 3 points to 65 with the low estimate all the way down at 53. Going into the September report, home builders had been unusually optimistic even as housing starts and permits, along with buyer traffic, have been lagging.




Housing Starts for August

Consensus Forecast, Adjusted Annualized Rate: 1.173 million

Consensus Range: 1.130 to 1.225 million


Building Permits

Consensus Forecast: 1.220 million

Consensus Range: 1.200 to 1.250 million


Housing starts and permits have proven unexpectedly soft in 3 of the last 4 reports and have been dimming the chances for a strong finish to this year's housing sector, even before hurricane effects are considered. Cooling in multi-family starts and permits has been behind the weakness with resilience in single-family homes, despite give back in July, an underlining positive. Econoday forecasters are calling for an August rise in housing starts to a 1.173 million annualized rate vs July's 1.155 million. Housing permits are seen slipping slightly to a 1.220 million rate vs 1.223 million.


Current Account Deficit for Second Quarter

Consensus Forecast: -$114.9 billion

Consensus Range: -$118.1 to -$108.5 billion


Helped by improvement in net exports, the current account deficit is expected to narrow in the second quarter to $114.9 billion from $116.8 billion in the first quarter. The account deficit relative to GDP has been moderate, at 2.5 percent in the first quarter.


Import Prices for August

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.0% to 1.0%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.5%


Month-end pressure for energy prices, the result of Hurricane Harvey, may give a lift to import prices with the Econoday consensus at 0.3 percent vs a marginal 0.1 percent gain in July and contractions in the two prior months. Export prices, at a consensus gain of 0.2 percent, are expected to moderate from July's agricultural-led 0.4 percent gain.




Existing Home Sales for August

Consensus Forecast, Annualized Rate: 5.480 million

Consensus Range: 5.350 to 5.550 million


Existing home sales have been more disappointing than not, falling 1.3 percent in July to a 5.440 million annualized rate that, nevertheless, is still near expansion highs. Condo sales weakened in July as did sales of single-family homes. But forecasters do see some improvement for August with the consensus at 5.480 million despite Hurricane Harvey at month end. Note that sales of new homes, which have also been soft yet near expansion highs, won't be released until the following week.


Federal Funds Target for September 19 & 20 Meeting:

Consensus Forecast, Midpoint: 1.125%

Consensus Range: 1.00% to 1.25%


No rate hike is expected at this month's Federal Open Market Committee meeting but the beginning of balance-sheet unwinding is a distinct possibility. Debate at the meeting will center on the path of inflation, which has been soft but did show life at the core level in August, and possible economic risks due to Hurricanes Harvey and Irma. Caution over either issue could delay balance-sheet unwinding to another meeting. Whatever the decision, wording and updates on unwinding will be closely watched. For rates, all forecasters see the FOMC holding the federal funds target at a 1.00 to 1.25 percent range with a 1.125 percent midpoint.




Initial Jobless Claims for September 16 week

Consensus Forecast: 303,000

Consensus Range: 285,000 to 325,000


Hurricane volatility makes the initial jobless claims call difficult but the consensus for the September 16 is 303,000 vs 284,000 and 298,000 in the prior two weeks. Claims in Texas edged back in the September 9 week but still remained elevated while those in Florida had to be estimated. Hurricane Harvey and Hurricane Irma will be skewing claims data for at least the next several weeks.


Philadelphia Fed Manufacturing Index for September

Consensus Forecast: 18.0

Consensus Range: 12.0 to 20.0


The Philadelphia Fed's manufacturing sample has been draining the dictionary of superlatives since late last year, showing enormous strength even at the same time that hard data on the factory sector have been mixed. The sample in August reported another month of very sharp growth in new orders and the largest build in backlog orders in 25 years. The Mid-Atlantic states were not affected directly by Hurricane Harvey but prices and delivery times could show pressure as they did in the Empire State report. The September consensus for the Philly Fed index is 18.0 vs August's 18.9.


FHFA House Price Index for July

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.1% to 0.4%


The FHFA house price index has been slowing though from strong levels, up only 0.1 percent in the June report with Econoday's consensus for July, however, at a solid 0.4 percent gain. Year-on-year rates have also been slowing but are still trending in the high 6 percent range.


Index of Leading Economic Indicators for August

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.5%


Low short-term interest rates and high consumer expectations have been underpinning the index of leading economic indicators which rose 0.3 percent in July following June's very strong 0.6 percent gain. Forecasters see the LEI coming in at plus 0.2 percent in August.




PMI Composite for September, Flash

Consensus Forecast: 54.9

Consensus Range: 53.8 to 55.1


PMI Manufacturing for September, Flash

Consensus Forecast: 53.0

Consensus Range: 52.4 to 59.0


PMI Services for September, Flash

Consensus Forecast: 55.5

Consensus Range: 52.4 to 56.0


Markit Economics' set of U..S. indicators were mixed in August as solid strength in services, at a final 56.0, well outpaced only moderate growth for manufacturing, at a final 52.8. Yet the bulk of the economy is made up of services as is the bulk of the PMI composite which finished August at a very healthy 55.3. Only limited hurricane effects are expected with the consensus for the PMI composite September flash at 54.9 with PMI manufacturing slightly higher at 53.0 and PMI services slightly lower at 55.5.


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