Odds and Ends

The Bureau of Economic Analysis will report its advance estimate of 3Q17 GDP growth on Friday. The figures will be revised, but investors should be aware that hurricane effects are likely to distort many of the GDP components. Looking ahead, October releases, including the employment report, will soon begin to roll in, likely unwinding the hurricane impact on the economic data. In other news, we now have some legislative progress on tax cuts. However, much of that may be already factored in. Foreign trade policy and Federal Reserve personnel decisions are important near-term risks to the outlook.

Hurricanes Harvey and Irma have distorted many of the economic data releases, but the impacts are transitory and should unwind without any significant effect on the underlying trends. Weekly claims for unemployment benefits rose, as they do after every major hurricane, but have since fallen back. The headline claims figure recently dropped to its lowest level in 44 years, which may reflect noise in the data. However, the September payroll data showed a large hit to travel and leisure in September, and Irma may have pulled forward seasonal job losses (which reflect the end of the summer travel season). If that’s the case, adjusted payroll figures could be a lot higher in October. Note that, beyond the hurricane effects, the tightness in job market conditions appears to be having an impact on economic growth. The Fed’s Beige Book, the summary of anecdotal reports from around the country, noted that worker shortages were “restraining business growth.”

Consumer spending growth had been on a soft trajectory in the third quarter (positive, but not very strong). Motor vehicle sales, which had been trending lower this year, jumped sharply in September, enough to lift the pace of consumer spending growth in 3Q17. However, the surge in vehicle sales was due to inventory clearance promotions, and is not expected to be repeated. Retail payrolls have been weakening since the start of the year. Some of that may be due to the continued rise in online sales, but it also may reflect increased balance sheet strains for low- and middle-income households (higher rents and healthcare costs, among other issues).

Business fixed investment was strong in the first half of the year. A large portion of that was the recovery in energy exploration. Oil and gas well drilling is capital intensive. The contraction that followed the drop in oil prices from late 2014 subtracted from overall GDP growth. The rebound added to business structures and GDP growth in the first two quarters of 2017. Hurricane Harvey restrained oil and gas well drilling in August and September, which should limit the 3Q17 GDP contribution from business fixed investment (expected to be positive, but not as robust as in the first half of the year).

The Federal Reserve’s September report on industrial production showed a sharp downward revision to figures for July. As a consequence, factory output fell at a 2.1% annual rate in the third quarter. That’s a sharp contrast to the strong ISM manufacturing survey results reported in September.

The increase in vehicle sales will reduce inventories, but the hurricanes will add, making it difficult to gauge the overall contribution to 3Q17 GDP growth (in addition, one also needs to consider price changes in the inventory calculation).