Thursday, 15 of November of 2018

Economics. Explained.  

Florence Will Result in a Temporary Growth Slowdown

September 14, 2018

We have heard about Hurricane Florence for weeks.  The good news is that it did not come ashore as the Category 4 or possibly Category 5 storm that had been feared early in the month.  Rather, it hit Wilmington as a Category 1 storm.  The bad news is that it hit Wilmington as a Category 1 storm.  For those of us in Charleston we appear to have been spared from anything more serious than tropical storm conditions.  Unfortunately, our good fortune is someone else’s misery.  A hurricane of any size can be devastating for the area that is impacted.

However, this is not Hurricane Katrina that flooded New Orleans in 2005, Hurricane Sandy that blasted the east coast of the U.S. from Washington to Boston in 2012, Hurricane Harvey that crushed Houston in 2017, or even Hurricane Irma that lashed all of Florida, Georgia, and South Carolina last year.  In this case, Florence was a Category 1 storm that missed major metropolitan areas.

Presumably fearing the frequently erratic and largely unpredictable paths followed by hurricanes in other recent years and the sheer magnitude and size of the approaching storm, the governors of South Carolina, North Caroline, and Virginia issued evacuation orders as early as Tuesday, September 11, for a storm that did not make landfall until Friday, September 14.  In hindsight, the evacuation orders seem grossly premature.  For the beach areas along the coast from the Outer Banks to Charleston, the loss of almost all tourist business for a protracted period in a season that lasts 13 weeks was heartbreaking.  The early evacuation orders exacerbated the damage on these areas.  But by missing major metropolitan areas the economic slowdown will be hardly noticeable for the economy as a whole.

The first place to look for economic weakness associated with the storm will be initial unemployment claims which is a measure of layoffs.  Almost certainly claims will rise significantly from a 49-year low level of 204 thousand in the week of September 8 to perhaps 240 thousand within a week or two.

An increase in claims suggests that the employment report for September will reveal a slowdown from the 190 thousand per month pace in other recent months to perhaps 150 thousand in September.  That report will be released on Friday morning, October 5.  The nonfarm workweek should also slip from a lengthy 34.5 hours in August to perhaps 34.3 hours.

In mid-October retail sales for September could be relatively unchanged or even decline slightly.  Ditto for industrial production for that month.

The softness in employment, hours worked, retail sales and industrial production suggest that the overall pace of economic activity declined in September.  Third quarter GDP will consist of two robust months —  July and August – followed by a weak month.  Thus, Hurricane Florence will have had some modest negative impact on GDP growth for the third quarter.  Based on the presumption that September would have been another month of steady growth we were expecting GDP growth for the third quarter to be 3.1%.  But if we replace one month of that quarter with a much slower pace of expansion, we will shave that forecast by 0.2% from 3.1% to 2.9%.  We will see the first estimate of GDP growth for that quarter on Friday morning, October 26.

But all the indicators mentioned – payroll employment, hours worked, retail sales ,and industrial production — will then rebound in October and the economy will get back on track.  So, whatever GDP growth was lost in the third quarter should be recaptured in the fourth quarter.  Accordingly, we have raised our projected GDP growth for the fourth quarter from 3.0% to 3.2%.   That figure will be released in late January.

What does all this mean?  Simply that in the month of October we will see some relatively anemic-looking economic indicators.  That could create an impression that the pace of economic activity is softening a bit, perhaps in response to the Fed’s series of rate hikes.  In our opinion, such a conclusion is unwarranted and in the following month (data for October, released in November), the soft data will be replaced by equally strong reports.  Growth will simply have shifted from one month to another (September to October), and because those months happen to be in different quarters, GDP growth will also have shifted from one quarter to the next (from the third quarter to the fourth).  Don’t be fooled into thinking that the upcoming data are indicative of any long-lasting economic slowdown.  That will not be the case.

Furthermore, none of this will dissuade the Fed from raising interest rates again at its September 25-26 gathering.  Even the reduced 2.9% GDP growth in the third quarter exceeds their estimate of potential growth (which appears to be 1.8%), and inflation has now climbed back to its 2.0% target and is poised to move higher.  Look another modest increase in rates of 0.25% at that meeting from 1.75-2.0% currently to 2.0-2.25%.

Stephen Slifer

NumberNomics

Charleston, S.C.


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