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Short-term vs. long-term impacts

  • ​​Hurricane Harvey's impact on Houston real estate will be long-lasting
  • Industrial production unexpectedly contracted in August
  • Unemployment claims remain slightly elevated versus trend
  • Spike in gasoline and lodging prices pushes headline inflation higher
  • Surprisingly weak retail sales for August

Temporary or permanent?

Although the economic data continued to surprise last week, it is important to distinguish what is temporary from what is permanent. Admittedly, that can be difficult. The hurricanes that hit the U.S. disrupted the data in ways that could be misleading. As we previously mentioned, Hurricanes Harvey and Irma likely subtracted about 50 basis points from economic growth in the third quarter, which would bring growth during the period down toward 2 percent, reducing momentum from the second quarter. The industrial production data for August is the most direct evidence of the impact from adverse weather– a decline of 0.9 percent. The Fed estimates that almost all of this decline was due to Hurricane Harvey. This contraction should reverse itself in the coming months, but it will take time. Likewise, unemployment insurance claims, which remain somewhat elevated, will revert back to trend over time. No underlying changes have altered the trajectory of the labor market.

Pricing data distorted

The weather has even distorted data on prices. The headline consumer price index (CPI) exceeded expectations in August. A spike in gasoline and lodging prices pushed inflation higher. On a year-over-year basis, headline inflation increased by 1.9 percent, an increase from July's 1.7 percent rate. Gasoline prices should remain higher in September due to Irma. But the temporary disruption is not seen in the core CPI, which excludes volatile components such as food and energy. Core CPI increased by 1.7 percent in August, the fifth consecutive month it has registered below the Fed's 2 percent target rate for inflation. 

Surprisingly weak consumer spending

Headline retail sales for August contracted, a much weaker result than anticipated, as an outright contraction was not forecast. Core retail sales, excluding volatile components like autos, and more indicative of trend, grew but remained below expectations. And retail sales data from previous months, while strong, was revised downward. Although the Census Department could not isolate the specific impact of Hurricane Harvey on August's data, the revision to prior periods creates some concern because it looks more permanent than temporary. From previous data it appeared that the U.S. consumer was becoming more active in recent months. If that's not the case, it could impact the performance of the economy in the latter half of the year.

Impacts on commercial real estate        

For commercial real estate, the temporary impacts will not mean very much. Many of them will revert back to trend, avoiding a more serious market distortion. 

A temporary spike in headline inflation should not have any real impact on inflation clauses in leases. 

The decline in retail sales could be more worrying for commercial real estate, for retail real estate specifically, but more generally if the U.S. consumer does pull back a bit causing economic growth to slow. Local markets – Texas and Florida – will see more direct impacts, but that will occur predominantly because of inventory being taken offline and a halt or delay in construction projects. It's a bit too early to assess the specific impact on Florida. Houston area officials estimate that at least 130,000 single-family homes sustained damage from flooding, and between 2,000 and 3,000 large apartment buildings and up to 5,000 smaller apartment buildings also sustained damage. Those changes are more permanent than temporary. Roughly 66,000 people are staying in hotels paid for with FEMA vouchers. 

Hotel occupancy in Houston during early September exceeded 80 percent, almost double the rate during the same period last year. And we expect to see stronger apartment rent growth and vacancy change in the Houston area in the future as many people move out of hotels and into available apartment units.  

Fed meeting this week

The Fed will meet this week and aim to disentangle the short-term impacts in the data from the longer-term trends. The Fed will likely overlook the temporary spike in inflation data, which they will view as transitory. 

A third rate hike for 2017 will remain unlikely. But the underlying trends in the economy should still give the Fed confidence to announce a normalization of its balance sheet, as soon as this week.

The Fed's balance sheet increased from roughly $800 billion before the crisis to roughly $4.5 trillion today. We do not expect a complete reversal of this increase – we expect a permanently larger balance sheet. But normalization could have a small impact on rates at the long end of the curve, depending upon how quickly normalization occurs.

What else happened last week

The administration once again surprised observers by negotiating with Democrats, this time to try to save the DACA program participants from an uncertain and potentially troublesome fate. 

From an economic perspective, ending this program could result in the loss of over 700,000 jobs and hundreds of billions in lost output that would be a drag on future economic growth.

As we have previously mentioned, the lack of people to fill jobs (with more than 6 million open but unfilled positions) remains more of a problem than a lack of jobs at this stage of the economic expansion. Losing 700,000 qualified workers would only worsen the labor shortage.

What we are watching this week

The housing market will dominate the data this week (along with the Fed meeting). Housing starts and building permits likely declined slightly in August due to hurricane-related impact. These trends should reverse in the near term and could even accelerate if damage to housing inventory in Texas and Florida necessitates new construction. We also anticipate a temporary decline in existing home sales from hurricane effects, although low inventory levels remains a bigger problem for home sales.

Thought of the week

New research suggests that the increase in opioid prescriptions from 1999 to 2015 could account for 25 percent of the observed decline in women's labor force participation and about 20 percent of the observed decline in men's labor force participation during that same period.

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