Hurricane Harvey To Have A Major Economic Impact
The flood in Houston is going to be catastrophic to the city’s economy. Houston is the 4th largest city in America, so this will show up in the August and September economic data. Don’t get fooled by the theory that this will create more demand, making it a net benefit for the economy. While new demand will come, it comes at the expense of people’s savings. Some businesses will never recover. It will take months and possibly years to rebuild the city. This could be a turning point for the entire American economy. I’m not saying a long recession is coming, but when you have a major city shut down for weeks, it puts a major dent in economic activity. We’ll start getting the details of how bad it will hurt the economy in a few weeks. The nightmare isn’t over for the city just yet.
The chart below shows the flood zones in Houston compared to the risk level. As you can see, only those who live in the very high risk and extremely risky areas are required to buy flood insurance. 52% of Houston homes and commercial properties that now have moderate to high risk of flooding are outside of what FEMA calls Special Flood Hazard Areas. This means many of the areas affected won’t get money from insurance companies to pay for the damage to their houses and their cars being totaled. There will be donations to help the victims, but it won’t make up for the spending power lost.
North Korea Fires Missile
Just when we thought the North Korean issue might be de-escalating, the country fired a ballistic missile over Japan. It split into three pieces and fell into the ocean. This led the Japanese prime minister to ask the U.N. to further pressure North Korea. This opens up Pandora’s box again as President Trump will need to issue another statement which North Korea will respond to. North Korea won’t be happy with the new pressure the U.N. puts on it. The biggest risk now is that North Korea fires a missile which is aimed to threaten Japan, but ends up killing people. That would escalate the situation quickly. Every time there is action like this missile being shot over Japan, the stock market should fall 2%-3%. It’s tough to decide whether to hedge against this risk because there’s no way of knowing the capabilities of the North Korean missile program and what is going through Kim Jong-un’s mind. I wouldn’t change my positioning based on this risk, but there’s clearly a chance the market has a large correction on a major news event related to these tensions. As you can see from the chart below, the number of North Korean provocations have increased in the past two years. Usually violent threats escalate situations; let’s hope that doesn’t happen and the situation cools down.
Economic News
The first economic report which was released this week was the trade in goods report for July. It showed a 1.3% decline in exports and a 1.7% increase in the trade gap which was $65.1 billion. The standout weakness came from motor vehicle exports which were down 8.0%. Imports were down 0.3%. Motor vehicle imports were down 2.8%. Car sales may improve in September as thousands of cars were totaled from the rain and storm surge caused by hurricane Harvey. Even with this weakness, most economists expect inventory investment to help the Q3 GDP report. When the services report comes out next week we’ll get a full understanding of the trade deficit. It will be interesting to see if Trump makes an attack on free trade again when he sees the trade deficit widening.
The advanced retail inventories showed weakness while the advanced wholesale inventories showed strength as they canceled each other out. Wholesale inventories were up 0.4% to $601.2 billion in July. The retail inventories were down 0.2% to $619.6 billion.
The final economic report released on Monday was the Texas manufacturing report. This will be the last report you’ll see from Texas showing the economy is doing well. It will be interesting to see how far this index falls in the next report. While this report isn’t an accurate depiction of the current situation in Texas, it gives us an outlook on the overall manufacturing economy in America. As you can see from the chart below, the index fell slightly to 20.3. Most of the metrics within the index saw modest declines in the rate of growth. The most interesting part of the report was the inflation increases as the prices received index was up 4.6 points to 10.2, the prices paid index was up 11.4 points to 26.9, and the wages and benefits index was up 6.3 points to 26.9.
I like to look at the quotes taken from the report to bring color to the numbers. A fabricated metal product manufacturing company said “We are swamped. There are no employees worth hiring for entry-level manufacturing jobs.” Unfortunately, Texas is now literally swamped as hurricane Harvey dumped over 30 inches of rain in some areas. The hurricane aside, this shows the same problem we’ve seen small businesses are having. There aren’t enough qualified workers to do the jobs outstanding. This will push up wage inflation. It’s shocking to see this at an entry-level position since there aren’t many qualifications necessary to get those jobs. Imagine how tough it is to fill jobs that require more skills and experience.
Conclusion
The economy continues to show solid growth. The only things that can stop it and the market are weakness caused by hurricane Harvey and the threat of nuclear war with North Korea. Unfortunately, both of those threats have been realized in the past few days. This should add some volatility to a week which ordinarily would be quiet because it’s the last week in August. The headline risk will only get larger in September when Congress is back in session as the debt ceiling issue still hasn’t be resolved
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