Odds and Ends

Summer is normally a pleasant time, but most Americans are likely to be happy to have August 2017 in the rear view mirror. Civil unrest, tensions abroad, devastation and destruction – yet, the stock market continues to improve. As financial market participants return from the three-day weekend, attention is expected to turn to Washington. Fears of a possible government shutdown or debt default may cause concern, but lawmakers should be able to avoid a self-inflicted wound.

Real GDP growth was revised higher than expected in the 2nd estimate for 2Q17, but the story was essentially the same. Consumer spending rebounded from a “soft” first quarter. Business fixed investment remained strong, with the rebound in energy exploration contributing significantly. The mild winter appeared to shift homebuilding activity ahead to 1Q17. Inventory growth was minimal, a contrast to expectations of a significant rebound. Taking the first two quarters together, real GDP rose at a 2.1% annual rate in the first half of the year, roughly in line with the pace of the last few years. Private Domestic Final Purchases (consumer spending, business fixed investment, residential investment), a better measure of underlying domestic demand, rose at a 3.4% annual rate in 2Q17 (+2.9% y/y), vs. +3.1% in 1Q17.

Hurricane Harvey will have a negative impact on 3Q17 GDP growth, but it will take some time to gauge by how much (note that the Bureau of Economic Analysis does a good job of estimating the impact of hurricanes and other natural disasters, when it can – but the advance estimate of 3Q17 GDP growth isn’t due until October 27). Rebuilding may add somewhat to GDP growth in the quarters ahead, but many residents did not have flood insurance and government infrastructure spending is likely to be limited by budget constraints. Gasoline prices will be higher in the near term, which will dampen consumer spending growth. Claims for unemployment benefits should spike over the next few weeks, but should retreat just as quickly. Nonfarm payroll figures are based on the working period that includes the 12th of the month. Hence, we may see only a moderate impact on job growth (if so, bouncing back in the next month’s report). Retail sales figures will take a hit.

Nonfarm payrolls rose less than expected in August (+156,000), with a downward revision (-41,000) to June and July. Contrary to headlines in the financial press, job growth did not “slow” in August. Remember, the monthly change in payrolls is reported accurate to ±120,000. That means that we can be 90% certain that the true monthly change was between +36,000 and +276,000. Statistical uncertainty and seasonal adjustment add noise to the payroll data, but we can reduce (not eliminate) that by looking at averages. Private-sector job growth in 2017, looks a lot like in 2016. We have seen increased business optimism this year, which ought to coincide with better job growth. However, we’re also seeing tighter job market conditions.

Average hourly earnings rose modestly in the initial estimate (+0.1%) for August. The year-over-year trend remains stuck at 2.5% – moderate, but less than one would expect given the low unemployment rate. There are a few theories as to why this is the case and we can expect to hear that from senior Fed officials (Governor Lael Brainard on September 5, Chair Janet Yellen in her September 20 post-FOMC press conference).