Listen, there’s considerable debate out there about what the impact from two catastrophic hurricanes is likely to be on the U.S. economy.
This comes at a decidedly bad time. I mean, there’s never a “good” time for horrific natural disasters, but the incoming data hasn’t been what one might call “robust” and the fiscal outlook has deteriorated to the point where pretty much everything in Trump’s agenda has been priced out by markets with the exception of maybe deregulation.
Throw in the indeterminacy around the future leadership of the Fed, and you’ve got a recipe for falling yields and a struggling dollar which is precisely what we’ve seen, especially overnight when the bottom really fell out for the greenback and 10Y yields hit a YTD low of 2.0144. And of course the bond rally is supercharged by the flight-to-safety associated with geopolitical turmoil (i.e. Pyongyang).
So the question for the U.S. economy here is whether any short-term harm will be recouped and then some by the cleanup effort. The consensus answer on that is “yes”, as we mentioned last weekend in “Let’s Compare Harvey To Katrina — Because That’s Fun.”
Bill Dudley was out this morning reiterating that in an interview with CNBC. Here’s the soundbite:
Those effects tend to be pretty transitory. The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.
I would expect that by the time we get to the end of the year and early 2018, the transitory negative effects of this storm I think will be over and we actually will start to see some of the benefits of the rebuilding efforts in terms of boosting the economy.
Just call that the ultimate example of “bad news is good news.”
Of course he also suggested that hurricanes could influence the timing of a Fed hike, so who knows.
Whatever the case, yields and the dollar recovered this morning as sentiment seemed to improve a bit. Here’s a quick set of charts:
As Richard Breslow wrote earlier today, Friday’s price action during U.S. trading is probably meaningless, but there’s how things shaped up in the morning (yellow shaded area) for whatever it’s worth.
Meanwhile, BofAML is out with some commentary underscoring the whole “bad now, good later” dynamic when it comes to hurricanes and the economy. Here are some excerpts:
We estimate that Hurricane Harvey will slice 0.4pp from GDP growth in 3Q, which takes our tracking estimate down to 2.5%. Hurricane Irma, if it hits Florida as feared, would also be a drag. Moreover, although rebuilding efforts will start in Texas, we have found there to be considerable delays in prior hurricanes, suggesting that 4Q may not benefit much from rebuilding. Looking ahead, reconstruction will create upside risk to growth in early 2018. The literature is mixed on the net impact on economic growth from natural disasters; it partly depends on the type of reconstruction and whether the changes improve upon the existing structure or facilities (boosts productivity) or simply restores them to their previous state.
We estimate the near-term effect to GDP growth using two approaches: 1) adjusting the assumptions for the high frequency data in our “nowcasting” GDP model and 2) back-of-the-envelope estimates based on the share of output from the hurricane-stricken areas. For the first, we create a counterfactual assuming no hurricane which is based on prior monthly inputs to our GDP tracking estimates. We then plug in new forecasts for the remaining August and September data, relying on findings from our earlier analysis of the high frequency data.
Using this approach, Harvey slices 0.4pp from growth, owing to weaker consumer spending (mostly autos) and construction spending as well as a bigger inventory drawdown (Table 2). This is consistent with the range of estimates from our back-of-the-envelope estimate. Houston is the 4th most populous city in the US and the Houston metro area accounts for 3.2% of GDP (as of 2015). As such, a 5 – 15% decline in output over the third quarter due to the hurricane would slice between 0.2 and 0.5pp from GDP growth.
We appreciate the effort there, but that relies on so many possibly dubious assumptions as to be virtually meaningless. Still, at least it’s something.
As far as the bond bulls are concerned, it might be time to ask if the rally has gotten ahead of itself now that we seem destined to get to a 1-handle on the 10 at some point in the not-so-distant future.
“Would-be buyers of U.S. 10 years on a 1 handle may wish to pause for thought,” Bloomberg’s Cameron Crise wrote this morning. “The precedent of the 2005 hurricane season suggests that poor sentiment should prove ephemeral…and rebuilding will be a positive for growth,” he adds, before noting that “given the relatively tight labor market the demand for construction workers in two large states could finally crack the nut of low wage growth, an issue mentioned by Bill Dudley last night.”
So believe what you want to believe here.
But you’d be forgiven for thinking, as one reader does, that this all sounds a bit broken-window-ish:
The Black Death pandemic also did wonders for the medieval European economy. A house first needs to burn down before it can be rebuilt. What the economy really needs right now is a good old-fashioned nuclear holocaust. Just think of all the new jobs that would create.
Since the Black death did these wonders for the economy mainly by putting upward pressure on wages due to the scarcity of labor, I trust we can count on the Republicans to keep things safe and stable.
Thanks for the article H. The point about 2005 is fair, but I think I’m still as skeptical as RTJR on this subject. Then again, I really wouldn’t be that surprised to see this market spin a “nuclear holocaust” into another rally. Anyway, have a good weekend.