Hurricanes’ Ripple Effect on the Economy

Hurricanes Harvey and Irma continued to make their presence felt last week – this time in economic data, as the economy reportedly shed 33,000 non-farm jobs in September, the first monthly decline since September, 2010, according to the U.S. Department of Labor. The jobs count will no doubt show a corresponding outsize gain over the next couple of months as these weather-related impacts dissipate.

The distortions in the September report were not confined to just the number of jobs. Average hourly earnings as measured by the Labor Department jumped 0.5 percent in the month, and by 2.9 percent over the past year, matching last December’s gain as the highest in this economic recovery. This strength was apparently distorted by the surge in utility workers deployed in the storms’ aftermath. It is for this reason that many were downplaying the strength in wages as not heralding the long-awaited inflationary impulse from falling unemployment.

But, perhaps the strength in wages should not be dismissed entirely. It is worth noting that average hourly wages were revised higher for each of the previous two months, neither impacted by the hurricanes. The July gain rose from 0.3 to 0.5 percent, and August rose from 0.1 to 0.2 percent. But it might take a couple of months before the jobs data is free from these distortions, and given the degree of noise in the report the bond market’s muted reaction was understandable. The yield on the ten-year note rose just one basis point to 2.36 percent. But that was still its highest level since mid-July, and over the past four weeks the yield has now risen 31 basis points. The next read on inflation will come on Friday with the September Consumer Price Index report. Both the headline and core rates are expected to move somewhat higher. But this report will also be distorted by the hurricanes, especially the impact of higher energy prices on the headline rate. Expect it to be largely overlooked as a result.

Focus on the Fed

Despite the lack of clarity on the inflation front, investors are overwhelmingly expecting the Fed to raise rates another quarter point at its December meeting, to which the CME FedWatch tool ascribes an 89 percent probability. A number of Fed officials have repeated their abiding belief in the relationship between employment and wage inflation, most recently outgoing Vice Chair Stanley Fischer in a television interview last week. Some at the Fed may also want to raise rates to give the Fed more room in the future to lower them if necessary, believing the economy is currently strong enough to absorb somewhat higher rates. Last week’s economic reports likely did little to suggest otherwise, particularly the ISM report on manufacturing conditions, which climbed to its highest level since 2004.

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