KEY DATA: Sales: -0.2%; Less Vehicles: +0.2%/ IP: -0.9%; Manufacturing: -0.3%

IN A NUTSHELL: “The early returns from Harvey are trickling in and the news is not good.”

WHAT IT MEANS: It looks like Harvey was not invisible, not a buddy and clearly not a cuddly bunny (anybody remember the movie?). It was, however, an economy wrecker – at least initially. Retail sales fell in August, largely due to a sharp drop in vehicle sales. Large parts of Texas and segments of Louisiana shut down and demand dropped, which should surprise no one. Vehicle sales this month will probably be bad as well, since Florida is shut down and much of the insurance payments, when they do arrive, will likely go to used vehicles. But there should be a rebound in October. Excluding vehicles, sales weren’t anything special, especially when you consider that the biggest winners were gasoline dealers, which were charging a lot more. Households spent money on food, both in restaurants and at supermarkets, while furniture stores saw things pick up. Despite the hurricane, sales at home improvement stores fell. I have no idea why that happened.

Not only did consumer spending slow in August, but industrial production cratered as well. Of course, utilities going offline does have a tendency to depress output. But even manufacturing activity hit the skids. Yes, the expected suspects, chemical and energy firms, were down, but there were a variety of other sectors that posted production cut backs. Still, the hurricane impacted industries are already turning around, though the lack of utilities in Florida will make it anyone’s guess what the September industrial production report will look like. As a counterpoint, the Empire State Manufacturing Index, produced by the New York Fed, was up sharply in August and held onto most of the gain in September. That gives some insight into how much the hurricanes changed the direction of the data, at least in the short run.

MARKETS AND FED POLICY IMPLICATIONS: The economic data are being distorted by the hurricanes and the first signs of how much the monthly numbers may be affected were seen in the August data. It looks like it is a lot. All I can do is report the data and suggest how they will likely change in the months ahead. Judgments on whether the longer-term trend in growth has been altered cannot be made until we see how quickly the recovery takes hold, how much money is poured into the affected states and the timing of the spending.   What can be said is that most economists are likely marking down third quarter growth and marking up the fourth quarter. I would not be surprised if the third quarter comes in below 2%. As for investors, they seem to be looking past the economy. They want nothing to rain on their parade.