KEY DATA: ISM (NonMan.): +1.4 points; Orders: +2 points; Employment: +2.6 points/ Trade Deficit: up $0.1 billion
IN A NUTSHELL: “The economy was doing fine before Harvey hit and if Irma causes major damage, it could be many months before we know the actual trend growth rate.”
WHAT IT MEANS: Well, coming into the worst phase of the hurricane season, the economy was doing fine. How we will come out of it is anyone’s guess right now. In August, the Institute for Supply Management reported that non-manufacturing activity rebounded from the downdraft it hit in July. Orders increased, production rose and backlogs built, all pointing continued good growth in the months ahead. This report mirrored the manufacturing numbers that were released last Friday. About the only negative in the report was that the level of the index was below the average for the past twelve months. It is still solid, but we may not see any major acceleration in growth going forward.
The U.S. trade deficit widened a teensy bit in July as both imports and exports declined. That is not good news. We want to see both expand as it would indicate both the U.S. and world economies are growing faster. On the export side, we sold a lot more food and aircraft, but fewer cell phones and motor vehicles. We imported more food, cell phones and computer products, but our demand for foreign oil, steel, vehicles and pharmaceutical products dropped. The trade deficit with most countries and regions widened, which should not make the president happy. It hit an eleven-month high with China even though exports expanded.
MARKETS AND FED POLICY IMPLICATIONS: The climate may not be changing, but in the span of two weeks, a hurricane dropped the most amount of rain on the continental U.S. in recorded history and the strongest Atlantic storm on record is bearing down on Florida. These extreme climate events will have real impacts on the pattern and level of growth and will modify trends in the data. The great losses in Texas and potentially Florida would slow growth in the third quarter and into the fourth. But as rebuilding efforts kick into high gear, spending in a variety of sectors will expand at unusually high levels. Going forward, it will be important to dismiss the headline number and figure out what is real and what is fake news, I mean, temporary factors. That complicates the Fed’s decision-making process as it will be hard for the members to have a good handle on growth. And the uncertainty could last through the fall as some of the data are lagged a month. This will be especially true if Irma or any of the remaining storms hit the mainland and cause major damage. All we can say right now is going into September, the economy was moving ahead moderately. Investors should use data for the next few months only to understand where things are, not necessarily to forecast what will happen going forward.