I want to start this article by recognizing the destructive power and the human misery rained down upon our fellow Americans by three of the most devastating hurricanes in U.S. history. Harvey, Irma and Maria’s far reaching impact on Texas, Florida and Puerto Rico, caused untold misery, destroying homes, taking lives and leaving in the aftermath an unknown future for thousands of men, women and children. This was surely the worst hurricane season in my lifetime and I want to wish all a speedy recovery.
We don’t have to go too far back in history to see the impact that hurricanes of this magnitude can have on our economy. In October, 2011 hurricane Sandy crashed into the Northeast with 90 mph winds and caused major damage, especially in New Jersey and New York. Sandy reduced U.S. Gross Domestic Product by 1.5% in the fourth quarter of 2011.
Harvey and Irma, the only time in U.S. history that two category 3 hurricanes ripped the American shores in the same week, potentially will have a greater impact than Sandy and the recovery will be slower and more painful.
Harvey has the distinction of affecting the region where 20% of our oil is refined into gasoline, the attendant rise of a gallon of gas by 30 cents puts a major hurt for those on a budget. For every one cent rise in a gallon gas, it decreases the American Consumer’s disposable income by one billion dollars. This alone will make the economic hit larger than Sandy.
There is good news in the economy, consumer sentiment was only down slightly in August. Americans who are in areas not affected by natural disasters, are still feeling good about their financial future. Consumer sentiment dropped only one point to 95.3 in August, a sign that the economy is on solid footing.
One concern among economists was the unwillingness of Americans to spend money in August. Consumer spending makes up 73% of GDP and if consumers are for some reason not going to malls or spending money online then this is a watch out for the balance of 2017. U.S. Consumer Spending rose an anemic 0.1 percent last month after being up a robust 0.3% in July and it is the first drawback since January.
I don’t believe that the current weakness with consumer spending will change expectations that the Fed will move on interest rates in December. It seems likely that Janet Yellon will continue to hike rates even though inflationary pressures pose no threat of accelerating. An interest rate hike would be a strong indication that the Federal Reserve believes that our economy in on solid footing through the end of the year.
Gross Domestic Product was restated in August to 3.1% annualized growth in the second quarter that is the best performance since Q1 of 2016. There will likely be a long and slow recovery in Texas and Florida but the rest of the United States not impacted by these natural disasters should continue to pull ahead. Economists’ estimates are that Hurricanes Harvey, Irma and Maria could shave off as much 1% to 2% from third-quarter GDP growth. The International Monetary Fund is forecasting the economy growing at a 2.3 percent rate in the July-September quarter.
I am still optimistic about 2017, the stock market has performed well, mainly because U.S. corporations have been very profitable. Inflation is under control and will remain so through Q4. Unemployment is at 4.4% and could drop as low as 4.2% by year end. Job creation has been okay over the past 12 months and consumers are poised for a return to active spending through the end of 2017. So keep the faith, America is still leading the world’s economy.