Last month’s hopes for a strengthening economy have been struck a serious blow by a nasty gang, namely storms Harvey, Irma, Jose and Maria. The short-term effect for the economy has been dismal. However, like New Orleans and Katrina, the longer term outlook for the devastated areas is promising. Lessons learned with Katrina have set the stage for a quicker recovery than that in New Orleans.
However, the present situation indicates the economy will show slower recovery in this second half of 2017. While the first quarter of 2017’s anemic growth of 1.2 percent was countered nicely by second quarter growth of 3.1 percent, early hopes of a 3 percent or more third quarter have shrunk to a 2 percent or so estimate, with hopes for a full year GDP of around 2.2 percent, down from earlier hopes of 2.6 percent or higher.
Consumer spending has not advanced at a pace sufficient to reach that 2.6 percent GDP growth rate. Retail sales data for August were terrible, with total retail sales falling 0.2 percent from July levels. While August was partially blamed on Harvey, June and July retail sales figures were revised downward, dampening my belief that consumers were about to continue the spending gains of the early second quarter.
Part of the blame can go to gasoline costs, where price increases boosted spending by 2.5 percent in August. There’s a connection between gasoline costs and other spending. With gasoline spending up 6.4 percent thus far in 2017, spending in health and personal care rose only 0.5 percent, clothing was up just 0.6 percent, department store spending fell 0.8 percent and electronics and appliances dropped 3.5 percent. Stalwarts autos (1.5 percent-plus for the year) and internet sales (8.4 percent-plus, down from double-digit growth) also disappointed.
Housing data show the same consumer caution. Existing home sales in August were at a 5.35 million pace, down 1.7 percent from July and up only 0.2 percent from sales levels of August 2016. While inventories remain a big part of the problem, Harvey takes some of the blame, accounting for a 5.7 percent drop in sales in the South. The only bright spot here is that prices are holding, with the U.S. median price of $253,500 up 5.6 percent over year ago levels. So the 2.1 percent inventory shrinkage year-over-year has firmed prices for existing homes.
New home data were a bit of an enigma. They have been somewhat weak all year, and Harvey affected the August pace of 560,000 sales, down 3.4 percent from July with weaknesses not only in the South, but also the Northeast and West. Unlike existing home prices, new home prices continued to sag. The median price of a new home was $300,200 in August, up a tiny 0.4 percent over August 2016 levels, yet inventories had grown almost 18 percent since August 2016. It’s hard to suggest the price differential between new and used is important, as the median sales price differential between the two has shrunk from 32 percent a couple of years ago to 18 percent today.
Inflation data got a Harvey spike in August as gasoline and other energy costs created a big wholesale bump in the Producer Price Index. The PPI for final demand rose a healthy 0.2 percent in August after a -0.1 percent and 0.1-plus percent performance in July and June. Energy costs rose 3.3 percent for the month, and final demand wholesale inflation would have been worse except for the fact that wholesale food costs fell 1.3 percent. Even so, the PPI for final demand rose 2.4 percent over the past twelve months, which certainly drew some attention from the Federal Open Market Committee (FOMC).
Gregory MacKay is economic consultant to Canandaigua National Bank.
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