Harvey and Irma Go to a Fed Meeting

Harvey and Irma Go to a Fed Meeting

Economic effects of natural disasters are typically short-lived. This statement is not meant to minimize the painful individual impacts, which are often long-lived and difficult. However, the short-term downdraft in everything from retail to construction spending quickly lessens as rebuilding begins.

This downdraft will also become a headache for the Fed. On one level, the Fed will be forced to deal with employment data that will be highly distorted.

To understand how this will unfold, we need to see how the jobs data are collected. The survey is done on the week containing the 12th day of the month. That is next week, which will be just after Irma hits land and before Houston is completely back on its feet.

This sets up September to be one of the most distorted months for employment data to the downside in recent memory. And it is not out of the question to have the September official employment figure even go negative in the wake of the two storms.

This should not affect the plan to reduce the Fed’s balance sheet. Instead, it may push out the next rate hike. The Fed has only one more rate hike to make it to its coveted neutral monetary policy position. Really, only a half hike. So, there is no need to be in a rush to get it done. Harvey and Irma may be the catalysts to push it out.

Houston is the fourth-largest economy in the US. It accounts for 30% of oil-refining capacity. The majority of the short-term inflation shock will come from higher prices for gasoline and other refined products. Something the Fed attempts to ignore anyway.

Hurricanes in Texas create a supply shock to everything from gasoline to diesel fuel to PVC piping, which is made from chemicals produced on the Gulf Coast. This is the widespread economic impact affecting more of the US than just Texas and Florida.

The length of time of those effects is anyone’s guess. But it is slightly inflationary in the near term. It may also artificially lift retail sales over the next couple of months.

There will be a distinct boost to auto sales due to the hundreds of thousands of flooded vehicles. But since the boost is from a supply shock, it will not be a positive in the medium term because the buying will taper out. There is no sustainable positive demand shock created by natural disasters.

The hurricanes will also distort most of the major statistical releases for the next couple of months. Maybe longer. Jobless claims will jump, and employment growth will dip in the immediate term. These will show up in the next couple of months of data. Because of the amount of manufacturing and refining done in the Houston area, industrial production and manufacturing indexes are also likely to face short-term headwinds.

During the recovery, the data will rebound. But the timing is difficult to determine, given the extent of the flooding and the timing of declines in water levels. Many of the bayous and rivers are expected to maintain flood levels for the next several weeks.

So, no significant bounce is likely until the fourth quarter. Even then, reconstruction will probably not be a dramatic lift to overall US growth. It will be a local boom of sorts.

On a somber positive note, construction activity in Houston following the Super Bowl had slowed significantly and was becoming a drag on the Houston economy. For both Houston and Florida, rebuilding will provide more construction jobs. And there is already a robust workforce to undertake the project in Houston.

Housing starts and permits data will also be affected due to the rebuilding. These effects will be most evident in Florida, given the strength of Irma and the potential destruction.

In the end, the Houston and Florida economies will recover. But the path will not be straightforward. Not to mention that the sheer size of the Houston economy, combined with Florida’s, will distort economic statistics. And the data will need to be treated with more skepticism than usual.

There is nothing positive about the destruction caused by hurricanes, but the economies will bounce back.

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