Storms and slowdown in wages = late Summer economic slowdown

While the overall fundamentals of the economy seem to be in a good place, with 4.4% unemployment, job growth continuing and the stock market near record highs, there have been some hints in September that maybe things aren't going to end up as swell economically as we thought a month ago.

Take a look at the Atlanta Federal Reserve, who has been consistently revising down their GDP growth estimates for the 3rd Quarter in recent weeks. The Atlanta Fed now says growth for this quarter will be 2.2% compared to the high 3’s a month ago.



Yes, some of that slowdown is likely due to Hurricanes Harvey and Irma, as both have caused notable spikes in unemployment claims for Texas and Florida in recent weeks (Florida’s total claims doubled last week, according to the most recent report from the Department of Labor). On a side note, it does not look like Puerto Rico or the US Virgin Islands are included in the US GDP numbers, so the devastation in those American territories won't be seen in our stats. So while the storms should dampen things in this quarter, it seems unlikely cause much damage much beyond that, based on the experience of other calamities in the last 12 years. However, that might also mean that September’s jobs and spending figures could trend down.

"If the past is any guide, Q3 real GDP could be marginally weaker than expected due to the offline effects of the storm and the fact that Houston accounts for 3.2 percent of U.S. GDP, in addition to being a key energy and shipping hub," Joe Quinlan, managing director and chief market strategist at U.S. Trust, Bank of America Private Wealth Management, wrote in a research note Thursday. "To this point, in the weeks following Hurricanes Katrina and Sandy, unemployment claims spiked, industrial production dropped and higher gasoline prices dampened real personal consumption expenditures."

A common narrative in the immediate aftermath of Harvey's landfall was that the storm would wreak havoc on local communities but wouldn't materially hold down the broader U.S. economy. But as the days went on and the full extent of its damage was assessed, outlooks and predictions began to darken.

"The storm's effect on U.S. GDP is likely to be substantial, but substantial when it comes to large storms is measured in tenths of a percent rather than full percentage points," a team of researchers at UBS wrote in a research note last week. "The fall in U.S. GDP comes from an outright decline in employment as well as a curtailment of exports, especially exports of petroleum products."

In a more recent note published Thursday, UBS researchers warned that "Harvey's economic implications point to more downside risk to payrolls and near-term GDP growth than initially anticipated."

Here’s the worrysome part- we already were seeing some disappointing figures before the hurricanes hit. A couple of weeks ago, we had a subpar jobs report, with only 156,000 jobs added, previous months revised down by 41,000, and unemployment ticking up by 0.1%.

The jobs figure could be a late-summer blip, but other economic reports also gave some signs of softening. That same report said average hourly earnings were only up 0.1% in August and a lower work week made weekly wages drop by 0.2%. Then inflation figures came out last week and said that prices went up by 0.4%. That was the largest increase since January, largely due to sizable increases in the price of gasoline and shelter, and when combined with the wage numbers, it meant that real weekly wages fell by 0.6% in August. The rising inflation means that the increase in real wages is only 0.6% in the last 12 months, well below where we were last year. Stagnant wages could also be reflected in a surprisingly soft retail sales report that hit 10 days ago, where sales declined by 0.3% for August, with notable drops in auto sales, and the largest increase being in gas stations, reflecting higher prices over actually added activity.

Combine that with some suppression of economic activity this month due to the hurricanes, and gas price spikes in other parts of the country driving up inflation, and you can see where we might be back in a softer-than-expected patch for the economy. And even with the hurricanes heading out to sea, oil on the US market continues to go up. It rose $1.40 a barrel today, has risen 11.8% in September alone, and Brent Crude is at its highest level in more than 2 years. That's going to show up at the gas pumps in the near future, meaning that higher prices may be the rule and not the exception for the last 3 months of the year.

Now maybe rebuilding and more normal weather will cause a slight bump up at the end of the year, and maybe there will be some kind of wealth effect due to this still-bubbly stock market. The US economy has proven very resilient for the 8+ years of this recovery, and I can't see things slipping into recession any time soon. But the recent economic reports and events of recent weeks makes me think that the only place that we’re seeing a “Trump Boom” is on Wall Street, and not anywhere close to the real world.

Of course, I'm assuming the GOP WON'T screw up health care this week. If that happens, then all bets are off, given the chaos will result in the insurance market over the next few months.