Global Economic Perspective: September

Short-Term Concerns Mask Robust US Economic Fundamentals

The issues that have dominated news cycles in recent weeks—North Korea, along with extreme weather in the southern United States—should not obscure the robust underlying fundamentals of the US economy, in our view. Though some short-term weather-related disruption is possible, the economy seems to be maintaining its path of moderately strong growth, aided by healthy contributions from consumer spending and business investment. These conditions have continued to allow the Fed to move further toward its goal of normalizing monetary policy, after policymakers left interest rates unchanged in September, but maintained their forecast of a rate hike before the end of the year. We believe the Fed’s decision to begin downsizing its balance sheet in October is likely to have only a marginal impact on the economy and financial markets.

Though market activity was somewhat subdued due to the traditional lull during August, a series of events—ranging from geopolitics to adverse weather—increased investor demand for the perceived safe haven of US Treasuries. Tensions between North Korea and the United States and its allies rose after several missile and nuclear tests by the North Korean regime, including one projectile that passed over northern Japan. The increasingly strident rhetoric from both sides and absence of consensus among major powers on how to respond to North Korea’s actions increased uncertainty, and by early September benchmark Treasury yields had fallen to their lowest level so far this year.

The US states of Texas and Louisiana were hit by Hurricane Harvey in late August, with severe flooding particularly affecting Houston, the fourth-largest US city and the capital of the country’s energy industry. In the aftermath, as many as a third of US oil refineries, many of which are located in the area around Houston, were estimated to have been impacted by flooding or supply disruptions. While the immediate impact was evident in higher wholesale gasoline prices, the overall effect on US economic growth appeared likely to be limited. Past experience suggested any short-term setback could be offset by increased expenditure in the months ahead, as infrastructure is rebuilt and economic activity rebounds. Nevertheless, with Hurricane Irma causing extensive damage across the state of Florida in early September, the potential for further weather-related disruption to the economy during the third quarter remained in focus.