The Global Markets Weekly: Slow and Steady Job Gain Ahead of Harvey’s Impact on Data

Posted September 4, 2017 by rvillareal

Slow and Steady Job Gain Ahead of Harvey’s Impact on Data

Friday brought the last clean read on U.S. employment for the next few months, as Hurricane Harvey may weigh on September payrolls to the tune of several hundred thousand or more, depending on how quickly local businesses recover ahead of the survey period in two weeks. While plausible based on a scaling up of the 2005 Katrina experience, analysts are unlikely to hang their hats on something like a negative impact of 0.5-1.0 million quite yet. The initial jobs estimate in the wake of that 2005 event came in at -35,000 (since revised up) relative to a prior trend of 200K-plus, and the greater Houston area accounts for 4-5 times the economic weight. Given the wide range of potential outcomes, coming reports will generally need to be looked through in favor of the bigger picture for the U.S. economy, which remains solid.

To that end, the August report was soft but not all that weak in the context of this point in the U.S. expansion. A 165,000 private sector gain is only modestly below the trailing 12m average. Wages were soft, but steady at 2.5% y/y, and the goods sector provided a clear tailwind of 70,000 jobs, significantly mitigating service softness, which was mostly concentrated in leisure and hospitality employment. Manufacturing firms added 36,000, mining 6,000, and construction 28,000.

Continued momentum should hold sway as the Federal Reserve contemplates a September announcement on balance sheet runoff and a potential December rate hike. Markets continue to discount a 2017 hike, and DE has reduced its odds to 55%, from 65%. While investors will look through transitory storm impacts (and eye another major hurricane developing in the Atlantic), the gumming-up of supply chains and port traffic may create greater-than-anticipated ripples.

Initial estimates on the storm’s impact made by DE and others suggest that the impact on GDP could be modest, with an impact of 0.5 percentage or less in Q3. Such estimates are highly tentative, with few willing to suggest that the impact on GDP growth will be worse than the 0.5 to 0.75 percentage point reduction to GDP growth incurred by hurricane Katrina in 2005, when damages approached $130B. August auto sales have already shown some impact on the loss in selling days, missing again at 16M annualized. Weekly claims figures will likely moving well into the 300k-plus range per week, from the low-200ks. Retail sales, consumer spending, and construction should be generally positive once stores open and rebuilding begins. The rebuilding effort may also boost business surveys like the ISM (already strong) but consumer confidence could take a hit.

• S.: A holiday-shortened week includes the August ISM Non-Manufacturing survey (Wed) and a round of Fed speakers including Brainard, Kashkari, and Kaplan (all Tue), plus the NY Fed’s Dudley (Thu).
• Eurozone: Steady core inflation at 1.2% y/y and mixed PMIs will have the ECB holding policy at the upcoming meeting, with some potential for comments talking down the euro. Any overt policy shift will be glacial given how long undershoot has persisted.
• UK: The August services PMI (Tue) will precede July industrial production (Thu), ahead of next week’s CPI data and Bank of England meeting.
• Japan: A light week save for revised Q2 GDP (Fri), which may be nudged lower from an initial 4% annualized q/q estimate.
• China: The Caixin services PMI (Tue) comes after firmer manufacturing figures. Surveys have softened since late-2016 as authorities tap the brakes on credit growth. Gradual deceleration in broader economic growth rates should be looked at favorably after questionable acceleration in the first half.

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