Hurricane Harvey and the Economy

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Now, onto this week’s report.

Hurricane Harvey was the major news of the last week. The short-term effects are mostly known and terrible. The long-term effects on the economy are less certain but probably not as dire.

The first economic focus when a natural disaster strikes Texas is energy. Hurricane Harvey already has increased gasoline prices, and prices are likely to rise a bit more before they stabilize. Since the United States now is a net exporter of energy, the hurricane will affect the global markets. Mexico, which is heavily dependent on oil exports from the United States, might be hurt more.

The major factor isn’t energy production. Hurricane Harvey did cause suspension of drilling and production in the Gulf of Mexico and in Texas and Louisiana. But production is likely to ramp up soon after the storm ends and the flood waters recede. Also, there has been a glut of oil, so there’s plenty in storage tanks to make up for lower production in the short term.

The real economic issue is long-term damage to refineries, pipelines and ports. The raw crude oil has to be refined into gasoline and other products. Then, the refined products and natural gas have to be transported to users. Pipelines are a major way of transporting oil and gas in the United States and ports distribute it globally.

The long-term damage to pipelines isn’t clear. The Wall Street Journal reported Tuesday that Colonial Pipeline announced its pipeline was having problems because of Hurricane Harvey. Colonial operates the biggest fuel pipeline in the United States. It is the major delivery system of gasoline, diesel and jet fuel to the eastern states from Texas. It is directly connected to several major airports on the East Coast. The pipeline hasn’t shut down but is operating at less than capacity.

We won’t know for a while how much damage Harvey did to this pipeline, others and ports, or how long the problems will persist. Extended shutdowns would mean higher energy prices and even shortages.

Also, about 15% of U.S. refining capacity shut down because of the hurricane, and more were making plans to shut down as the rain continued this week. At the same time, some refiners said they were trying to restart operations soon after the rain let up.

Most estimates I’ve seen say that it could take several weeks after the waters recede for refining and distribution to return to full operations. But if damage is really bad, it could be months before all of the operations are back to normal.

Outside of energy, there are broader consequences for the economy. Many businesses are closed in the area affected by the storm and will remain closed for a while. They won’t be generating economic activity, and many of their employees likely won’t be paid.

Houston is a major city, and the surrounding area of Texas normally generates significant economic activity. So, the hurricane is going to affect the national economy.

Overall, it looks like national gross domestic product (GDP) for the quarter and perhaps the next quarter is going to be lower than it otherwise would be. At this point, I don’t think the decline will be enough to cause a recession or knock the United States off of its path of sustainable growth. Usually, a region bounces back from these things faster than many anticipate soon after the disaster.

I expect that will be the case again. After a slowdown, the national economy should be back on track around the end of this year or early in 2018.

The Data

Consumer Confidence, as measured by The Conference Board, is soaring again. It rose to 122.9, up from a revised 120.0. This is not quite as high as March’s peak of 124.9, but it ranks as the second highest since 2000. The survey was taken after the rioting in Virginia and news of the hostile activities in North Korea. This report recently has diverged from the University of Michigan’s Consumer Sentiment survey, so it will be interesting to see the latter report on Friday.

The reasons for the optimism are easy to see in the Personal Income and Outlays report. Personal Income rose 0.4%, with wages and salaries rising 0.5% for the second month. Spending followed suit, rising 0.3%. Those numbers indicate a healthy consumer economy driven by a solid employment market.

Inflation, as measured by the Fed’s preferred PCE Price Index, continues to barely move, rising only 0.1% for the month and 1.4% for 12 months.

Manufacturing continues to make steady progress.

Durable Goods Orders were weak if you look only at the headline number, down 6.8%. But that includes the volatile transportation sector, which includes aircraft sales. Exclude transportation and orders increased 0.5% for the month and 5.6% over 12 months. The important core capital goods segment, which is basic business investment, increased 0.4% for the month and 3.5% for 12 months.

The Dallas Fed Manufacturing Survey also was a solid report. It came in at 20.3, compared to 22.3 last month. I don’t know if this survey will be as strong in the coming months after Hurricane Harvey, but it has been very strong for a while now.

The Chicago PMI held steady at a strong 58.9.

The Fed’s regional bank surveys are based on small samples of businesses that volunteer to participate. That could explain why they’ve differed significantly from government data on economic activity. The surveys have been much stronger than the data. The manufacturing data has been improving the last few months, but at a more measured pace than the surveys.

Employment continues to look strong based on the lead-ins to Friday’s Employment Situation Reports. The ADP Employment Report said 237,000 private sector jobs were created in the last month, and last month’s number was revised to 201,000 from 178,000.

New unemployment claims rose only 1,000, so they still are near historic lows, as is the four-week average.

The S&P Corelogic Case-Shiller Home Price Index confirmed the previous FHFA House Price Index finding that residential real estate prices didn’t move much in June. Case-Shiller had prices rising 0.1% for the month and 5.7% over 12 months. Stability in prices should give first-time homeowners a chance to buy.

Home sales continue to be modest. Pending home sales declined 0.8% for the month, with the West being the only region with a gain. Existing home sales declined in three of the last four months after a strong start to the year.

Second-quarter GDP improved in the second estimate to 3.0%, from an initial estimate of 2.6%. Next month will be the third and final scheduled estimate of second-quarter GDP. An upward revision in consumer spending accounted for much of the improvement. Non-residential investment also was strong in the second quarter, while residential investment declined 6.5%.

The Markets

U.S. stocks rose in the last week. The S&P 500 gained 0.61% for the four weeks ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.47%. The Russell 2000 returned 1.62%. The All-Country World Index added 0.43% and the emerging market equities gained 1.15%.

Long-term treasuries rose 0.16% for the week. Investment-grade bonds gained 0.17%. Treasury Inflation-Protected Securities (TIPS) gained 0.08%. High-yield bonds returned 0.41%.

The dollar rose declined 0.26% and now is down 8.86% for the year.

Energy-based commodities lost 1.12% for the week. Broader-based commodities fell 0.27%. Gold gained 1.70% and now is up 12.72% for the year.

Bob’s News & Updates

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