Natural Disasters To Take An Economic Toll; Global Expansion Continues
Extensive disruptions from Hurricane Harvey and Hurricane Irma will likely have a short-term impact on third quarter economic growth. Gas prices are already near two-year highs, though consumer confidence remained optimistic based on August readings. While the pace of job growth slowed in August, wage growth in this tight labor market has yet to result in the inflation threat and market expectations for further interest rate hikes from the Federal Reserve.
The synchronized global economic recovery continues and has helped lift commodity prices from the low-price environment that sectors such as metals had experienced in recent years. Overseas stock markets are also attractive from a valuation perspective and sectors like emerging markets outperformed U.S. and European benchmark indexes during August.
2nd Quarter U.S. Growth Higher than First Reported; Harvey’s Wrath Hits Oil & Gas Sector
U.S. economic growth was revised upwards to an annual rate of 3.0%, the Commerce Department reported in late August. The revised figure, up from the 2.6% advance estimate released in July, represented the fastest pace of real (inflation-adjusted) economic growth in two years. The revised increase in real GDP reflected increases in consumer spending on goods and services as well as increases in business investment, exports and federal government spending, the Commerce Department said.
Hurricane Harvey is expected to be among the most expensive natural disasters in the U.S., though damage estimates remain in flux. The storm is expected to have some impact on third quarter economic growth. Harvey’s losses could exceed those of 2005’s Hurricane Katrina, though at the time of this writing, Hurricane Irma was also forecast to bear down on the Florida peninsula, which could potentially produce damages exceeding those of Harvey or Katrina.
Economic losses from Hurricane Harvey caused by wind, storm surge and inland flooding could be as high as $70 billion to $90 billion, according to RMS, the Newark, Calif.-based catastrophe risk modeling firm. Moody’s Analytics has estimated total economic losses of from $86 billion to $108 billion, with about $11 billion of that from lost economic output and the rest in property damages, according to several media reports, including this article in USA Today, which also discusses the storm’s potential impact to third quarter GDP.
The estimated loss figures are not for insured losses. Significant damages from flooding could mean that much of the residential damage may not be covered by conventional insurance. In the Houston metropolitan area, RMS estimates there are more than seven million properties representing more than $1.5 trillion in value. The flooding comes amid what is already around a $25 billion deficit within the National Flood Insurance Program, largely due to Katrina and 2012’s Superstorm Sandy.
Oil and gas production and refining operations in the Gulf were still in the process of returning to service, as the third quarter got underway. In the storm’s aftermath, an estimated 15% or so of U.S. oil refining capacity was still offline as of Sept. 2, according to S&P Global Platts.
Americans already are paying more at the pump with prices within pennies of topping the highest price paid ($2.67) for a gallon of gas since mid-August 2015. The national gas price average at $2.65 is up 27 cents from the prior week, the automobile club AAA said on Sept. 5. Harvey’s impact on commodity prices is briefly discussed below in the Commodities section.
Consumer, Manufacturing Data Remain Positive
The University of Michigan’s consumer surveys show that its Index of Consumer Sentiment posted a final result of 96.8 in August. The sentiment index has been higher during the first eight months of 2017 than in any year since 2000, the peak year of the longest expansion in U.S. history. Given the current resilience of consumers, chief economist Richard Curtin noted that temporary increases in gas prices and a potentially brief period of economic weakness because of Hurricane Harvey are unlikely to derail confidence.
The Conference Board’s Consumer Confidence Index increased to 122.9 in August, up from 120.0 in July. The Present Situation Index increased from 145.4 to 151.2, while the Expectations Index rose marginally from 103.0 last month to 104.0. Similar to July, consumers’ assessments of current conditions continue to hover at a 16-year high, though short-term expectations were relatively flat. That indicates that consumers don’t anticipate an acceleration in the pace of economic activity in the months ahead, the Conference Board said.
Economic activity in the manufacturing sector also expanded in August with the Institute for Supply Management (ISM) reporting that its purchasing managers index (PMI) increased 2.5 percentage points to 58.8 compared to the previous month. A reading above 50 indicates that the manufacturing economy is expanding. The August reading was the highest since April 2011 and also shows growth in manufacturing for the 12th consecutive month.
Pace of Job Growth Eases
Employers in the U.S. added 156,000 jobs in August – the 83rd straight month of job growth and the longest on record. The unemployment rate crept up slightly to 4.4% compared to 4.3% in July, according to the Bureau of Labor Statistics. Average hourly earnings increased by 3 cents to $26.39, compared to a 9-cent increase in July. Compared to a year ago, average hourly earnings rose by 2.5%.
August’s job growth figures were below expectations and at a slower pace than recent monthly reports. Thus far this year, employment growth has averaged 176,000 per month, compared to the average monthly gain of 187,000 in 2016, according to the Labor Department. June and July nonfarm payroll employment revised downward by a combined 41,000, resulting in gains of 210,000 and 189,000, respectively.
The recent employment survey was largely completed prior to Hurricane Harvey. August data, in general, tend to be revised due to seasonality. The Labor Department notes that for severe weather conditions to reduce employment estimates, employees have to be off work without pay for the entire pay period.
Despite Tight Labor Market, Inflation Remains Subdued
The tepid wage growth could be another sign that inflationary pressures in the U.S. economy may not warrant further interest rate hikes from the Federal Reserve, at least not at the Sept. 19-20 meeting of the Federal Open Market Committee (FOMC). Recent inflation data also continues to be below the Fed’s 2.0% target.
The central bank, however, may begin to formulate and announce its plan to trim its $4.0 trillion-plus balance sheet, the holdings of which were purchased following the 2008 financial crisis to inject liquidity into financial markets and help bolster economic activity.
The minutes of the July 25-26 FOMC meeting indicated that the Fed’s policymakers are becoming concerned about persistently soft consumer prices. That is despite higher rates of resource utilization, including the lowest unemployment rate in 16 years. The minutes also indicated that some Fed governors wanted to begin reducing the Fed’s balance sheet, while others wanted to wait given that inflation remains below the Fed’s target.
Key measures of inflation as reported in August by the Consumer Price Index (CPI) were again weak, maintaining the trend of recent months. Core CPI, which excludes food and energy prices, rose by 1.7% compared to July 2016 – the same annualized increase as reported by the Bureau of Labor Statistics in May and June of 2017.
The Personal Consumption Expenditures (PCE) index, excluding food and fuel prices, was up by only 0.1% in July compared with the previous month. The core PCE rose by 1.4% compared to July 2016, according to the Bureau of Economic Analysis.
As these figures and the data on wage growth discussed above demonstrate, the tight labor market appears to be among the most non-inflationary in recent times. Despite the decline in the unemployment rate’s moving three-month average from 8.2% in July 2012 to 4.3% in July 2017, the average annual rate of core PCE price index inflation has fallen from 1.9% to 1.5%, according to Moody’s Analytics.
In addition, annual average hourly wages for the three-month period through July have increased by only 2.5%. That compares to a 3.6% annual gain for the three-month period that ended in February 1999, the last time the unemployment rate’s moving three-month average fell to 4.3%, Moody’s Analytics says.
Real Estate – Supply Constraints Limiting Housing Sales Activity
New and existing home sales declined in July as ongoing affordability and supply issues continue to impact activity. The sales market for existing homes, in particular, has hit somewhat of a bottleneck due to supply constraints. Sales velocity, though, has been strong with more homes selling within 30 days or less of their listing.
New residential construction also remains below historic trends and trails population growth and household formation. Privately-owned housing starts fell by 5.6% in July compared to the same month a year ago. At a seasonally-adjusted rate of 1,155,000 units, starts were also 4.8% below June’s revised figures, the Commerce Department reported in mid-August.
Sales of new single-family homes, meanwhile, fell in July by 9.4% (at an annual rate of 571,000) compared to June’s revised figures of 630,000 annualized units, according to the Commerce Department. The monthly figures represented the slowest annualized sales pace since December 2016. Yearly comparisons were also lower as July’s sales represented an 8.9% decline from July 2016.
Existing home sales also fell in July. Sales declined by 1.3% from the previous month to a seasonally-adjusted annual rate of 5.44 million, the lowest sales rate thus far in 2017, according to the National Association of Realtors (NAR). July’s sales pace was 2.1% higher compared to a year ago, though comparisons were based off of relatively weak sales figures in July 2016.
Total housing inventory of existing homes for sale was 9.0% lower compared to July 2016. That represented the 26th straight month that inventory declined year-over-year and is at a 4.2-month supply at the current sales pace (compared to a 4.8-month supply a year ago), according to the NAR. On the new home sales front, the median number of months for sales once builders complete their units fell to 2.9 months, compared to 3.6 months in July 2016, according to the Commerce Department.
Given the low inventory of homes on the market, prices for new and existing homes continue to rise. The median sales price for new homes sold in July was up by 6.4% year-on-year to $313,700, according to Commerce Department figures.
Meanwhile, figures from NAR show that the median existing-home price for all home types in July rose by 6.2% to $258,300, the 65th straight month of year-over-year gains. The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose by 5.8% on an annualized basis in June, another new high for the National Home Price Index, which is now 4.3% higher from its July 2006 peak.
Not only are prices rising, which groups like the NAR say is outpacing incomes, but price appreciation in many markets is occurring so fast that prospective buyers are becoming frustrated. The nation’s largest real-estate trade group noted that 51% of homes sold in July were on the market for less than 30 days – the fourth straight month the typical listing went under contract in less than 30 days. The median figure for days on the market was 36 days a year ago.
“This speaks to the significant pent-up demand for buying rather than any perceived loss of interest,” Lawrence Yun, NAR’s chief economist said in July’s press release announcing existing home sales. “The frustrating inability for new home construction to pick up means inadequate supply levels will keep markets competitive heading into the fall.”
Similar to recent months, mortgage rates remain low.
Optimism in Global Economic Expansion Fuels Rise in Commodities, Overseas Markets
Sustained growth in major economies throughout the globe is helping to lead a rebound in commodities prices, particularly for industrial metals. Second quarter economic growth in the eurozone was revised upwards to 2.3% compared to a year ago. Japan’s economy grew by 4.0% in the second quarter, compared to the previous quarter, surpassing estimates.
Geopolitical risks pushed up gold prices during August, while yields on most maturities of U.S. government debt declined. Low valuations for stocks in emerging markets and even some equity markets of developed economies remain attractive to investors compared to U.S. equities. The continued fall this year in the U.S. dollar is also benefitting these trends.
Emerging Markets Outpace U.S. Equities; Treasury Yields Fall
Emerging market stocks, as tracked by major benchmark indexes, mostly outperformed those of developed North America, Europe and Asia during August. In the U.S., the Dow Jones Industrial Average was up 0.26%, while the S&P 500 ended up 0.05% and the Nasdaq Composite gained 1.3%. For the year through August, stock performance has been strong, with technology shares among the leaders.
Looking abroad, the MSCI All Country World Index (ACWI) rose by 0.17% during August, while the MSCI All Country Asia Index was up by 0.55%. The MSCI All Country Europe Index was unchanged, while the MSCI All Country Europe Growth Index rose by 0.69%.
While August, in general, is a low-volume trading month, geopolitical risks and low-inflation data helped fuel a bid for safe U.S. government debt. The result was that 10-year Treasury note yields fell to their lowest levels since just after the presidential election. The yield on the 10-year note ended August at 2.12%, down from 2.45% at the end of 2016. The flight-to-quality bid the U.S. bond market receives from nervous investors and traders was also somewhat evident in early September with heightened fears over North Korea’s nuclear tests.
The continued decline in the U.S. dollar, which is, in part, driving higher commodity prices, also led to broad gains in emerging market stocks as well as in developed countries where economic fortunes are tied to the metals and mining industries. Valuations for emerging market stocks also generally trade at a discount to U.S. stocks.
Among the standout performers in emerging markets was Brazil. The MSCI Brazil Index was up by about 6.3% in August and about 21.5% year-to-date on a net-return basis. Economic data revealed that the country’s economy grew by 0.2% in the second quarter. That followed growth in the first quarter, officially ending one of the country’s most severe recessions.
With copper prices at or near three-year highs, equities in countries such as Chile, which is a big copper and nickel producer, also posted stellar performance during August. The MSCI Chile Index was up by nearly 5.5% this past month and has risen by more than 30.0% this year through Aug. 31.
Commodities: Harvey Fuels Rise in Gas Futures; Metals Buoyed by Global Growth
Hurricane Harvey’s devastation filtered through to commodities markets as the Gulf Coast is a major producer and refiner of oil and gas products. NYMEX unleaded gasoline futures settling in October spiked by more than 12.0%, most of those gains coming in the final week of the month as Hurricane Harvey made landfall in Port Arthur, Texas.
On the other hand, the NYMEX light crude contract fell by nearly 8.4%. Oil prices continue to be challenged by strong inventory levels in the U.S., which were exacerbated by refining disruptions along the Texas coast in the wake of Harvey.
Prices of metals, meanwhile, continued to rally in August as the economic recovery in the global economy has helped lift demand for metals like aluminum, copper, iron ore and zinc. Copper futures settling in December gained 6.0% in August on the COMEX and have risen by about 48.0% from the same period a year ago. Prices for aluminum and zinc also rose for the month by more than 8.5% and 11.0%, respectively, according to the London Metals Exchange.
Sparking the upward momentum has been sustained economic growth across the globe. The International Monetary Fund (IMF) in April projected global GDP growth of 3.5% in 2017. In July, the IMF revised upward China’s economic growth estimates by 0.1% to 6.7% in 2017, and by 0.2% to 6.4% in 2018.
China is the world’s biggest consumer of metals. The Chinese government has sought to put policies in place to offset rising debt levels, cool speculation in the country’s property markets and reduce industrial capacity. The latter trend has been viewed as a short-term boost to commodity prices, though the government’s other macroeconomic policies have raised concerns among investors that the country’s ability to fund its portion of global economic expansion would wane.
Recent economic data, though mixed, appears to support the case, for now, of sustained moderate growth. China’s official factory and service sector PMIs for August were 51.7 and 53.4, respectively. While the service PMI fell from 54.5 in July, the manufacturing PMI rose from 51.3. The country’s economy grew at a 6.9% pace in the second quarter.
Commodity prices are also getting a boost from a weaker U.S. dollar. A falling dollar generally pushes commodity prices higher as more dollars are needed to purchase dollar-priced commodities. The WSJ Dollar Index, which tracks the value of the dollar against 16 other currencies, is down by 7.8% for the year through August.
Precious metals also rallied last month, with gold gaining on dollar weakness. Gold closed at $1,327.00, up nearly 3.0%; silver futures gained 3.64% to close at $17.58; and platinum futures were up by 5.95% to $1002.40, all for contracts traded on the COMEX.
As previously noted, Hurricane Harvey may have a temporary impact on third quarter economic growth. How much may likely depend, in part, on how quickly the oil and gas sector returns to full capacity, and the impact of any supply chain disruptions on various industries. Reconstruction efforts will likely lead to economic expansion, particularly given that Houston is the nation’s fourth most populous city.
Hurricane Irma will also likely take a toll on the economy, given the trillions of dollars of property at risk from the storm. Depending on the storm’s track, a direct hit on Florida could threaten more than $1 billion of crops and potentially result in $100 billion or more in insured losses.
Source Links Cited in Article:
University of Michigan Survey of Consumers: http://www.sca.isr.umich.edu/
The Conference Board Consumer Confidence Index: https://www.conference-board.org/data/consumerconfidence.cfm
Institute for Supply Management: https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1
Second quarter U.S. gross domestic product: https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
RMS losses for Hurricane Harvey: http://www.rms.com/newsroom/press-releases/press-detail/2017-08-30/rms-models-economic-losses-from-major-hurricane-harvey-and-associated-flooding
Hurricane Harvey’s potential impact to third quarter GDP: https://www.usatoday.com/story/money/2017/09/01/hurricane-harvey-expected-ding-q-3-economic-growth/626859001/
National Flood Insurance Program’s deficit: https://www.bloomberg.com/news/articles/2017-08-28/how-harvey-squeezes-congress-on-flood-insurance-quicktake-q-a
U.S. oil refining capacity: https://www.platts.com/latest-news/oil/newyork/oil-factbox-texas-refineries-pipelines-ports-21824122
National gas prices: http://gasprices.aaa.com/gas-prices-continue-increase-across-country/
August 2017 Employment Solution: https://www.bls.gov/news.release/pdf/empsit.pdf
Consumer Price Index: https://www.bls.gov/news.release/cpi.htm
Personal Consumption Expenditures Index: https://www.bea.gov/newsreleases/national/pi/2017/pi0717.htm
Moody’s Analytics and inflation: http://www.moodysanalytics.com/~/media/article/2017/weekly-market-outlook-jobless-rates-waning-influence-on-inflation-and-the-fed.pdf
New Residential Construction: https://www.census.gov/construction/nrc/pdf/newresconst.pdf
Monthly New Residential Sales: https://www.census.gov/construction/nrs/pdf/newressales.pdf
Existing Home Sales: https://www.nar.realtor/news-releases/2017/08/existing-home-sales-slide-13-percent-in-july
S&P CoreLogic Case-Shiller Home Price Indices: https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/574349_cshomeprice-release-0829.pdf?force_download=true
Eurozone second quarter GDP: http://ec.europa.eu/eurostat/documents/2995521/8213935/2-07092017-AP-EN.pdf/6fe1f60c-51e2-4b98-9d14-ca6ea5c7e260
Japan second quarter GDP: https://www.cnbc.com/2017/08/13/japan-reports-second-quarter-gdp.html
International Monetary Fund World Economic Outlook Update, July 2017:
China Purchasing Managers Index: https://www.bloomberg.com/news/articles/2017-08-31/china-factory-gauge-signals-economic-output-resilient-in-august
China second quarter GDP: http://www.stats.gov.cn/english/pressrelease/201707/t20170718_1514198.html
Hurricane Irma potential losses: https://www.bloomberg.com/news/articles/2017-09-06/irma-sweeps-over-caribbean-as-florida-braces-for-powerful-storm
Sources and Links for Data for Stock and Bond Chart
http://money.cnn.com/data/commodities/ accessed August 31, 2017.
London Metals Exchange:
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