Our thoughts and prayers go out to those impacted by Hurricanes Harvey and Irma. As we learned 16 years ago after 9/11, and then again after Hurricanes Katrina and Rita in 2005, people have the resiliency to make it through challenging circumstances. The same holds true for the economy and the capital markets.
Near-term, the hurricanes will reduce real GDP growth for the balance of this quarter. However, a more than offsetting boost to economic activity is likely to unfold in late 2017 and early 2018.
Despite hurricane-related fears, a review of the costliest hurricanes over the last 25+ years shows that the equity market impact has been limited. We believe the U.S. economy will ultimately show resiliency and the hurricanes will not significantly alter the Fed’s plans to normalize monetary policy at a slow and steady pace.
On a positive note, Democrats and most Republicans agreed with the President on a short-term debt package with hurricane funding for FEMA. This good news from Washington officials might be a sign that something could get done on the fiscal side of the equation.
Weaker Now, Stronger Later
Over the near-term, the one-two punch from Hurricanes Harvey and Irma will weaken many of the economic statistics that will be released. Heavy property and product losses, a sharp drop in restaurant spending, tourism, industrial production and utility output, will likely reduce real GDP growth in the current quarter by as much as one percentage point. Initial unemployment claims have already started to spike and the employment statistics for September could have a significant setback from businesses that were temporarily closed due to the hurricanes. Price increases for gasoline, building materials, and selected consumer products are likely to provide a boost to the next round of inflation readings. Similarly, worker shortages associated with rebuilding activities could fuel a rise in labor costs.
Although the domestic economy was expanding at more than a three percent pace in the early part of this quarter, the impact from the hurricanes will likely trim real GDP growth to about two percent for the full quarter. However, what hurts the economy now is anticipated to provide a more than offsetting boost to real growth in 2017:Q4 and the first half of 2018. The need for replacement housing and the rebuilding of businesses and inventory, combined with the demand for vehicles, products, and furniture, will provide an added boost to the durable goods sector. Several manufacturers are likely to increase production schedules over the balance of this year. Net, we look for the recent hurricanes to ultimately provide a catalyst to economic growth over the next six to nine months.
What about Stocks and the Fed?
A review of major domestic hurricanes over the last 25+ years show that the impact to the stock market has typically been limited. Following the six costliest hurricanes over the period, the stock market was higher six and 12 months later in five of the six occasions, with a median S&P 500 index price return of 6.3 percent and 10.1 percent, respectively. In fact, the only decline that was registered for the stock market was in the aftermath of Hurricane Ike in September 2008. And, the catalyst to the sell-off back then was the financial crisis and the great recession, rather than the hurricane.
The post-hurricane economy recovered in the two quarters after Andrew in 1992, Ivan in 2004, Katrina, Rita, and Wilma in 2005, and Sandy in 2012 was respectable as real GDP growth accelerated to a 2.9 percent pace during these periods. If history repeats itself and the U.S. economy remains resilient, the Fed is still likely to reduce the size of its balance sheet this autumn and to normalize interest rates over the next six to nine months. On the fiscal side of the equation, the passage of a short-term debt ceiling increase with hurricane relief could be a hint that a limited bipartisan deal to address the budget and tax system might be doable later this year.