U.S. Economy Shows Good Momentum Despite Recent Storms
We are seeing the disruptions caused by a very active hurricane season in some of the economic data for Augustand September. We expect to see more evidence of storm effects in the data for October, and perhaps in the data for November as well. Despite the local and regional economic disruptions, the catastrophic damage and the loss of lifefrom the recent hurricanes, the U.S. economy remains in good shape and looks set to end the year with moderate positivemomentum. This speaks volumes about the resiliency of the U.S. economy.
Labor data for September was muddied by the storms and beyond that it was simply quirky. September payrollsdropped by 33,000 due to business interruptions from Hurricanes Harvey and Irma. Payroll data is collected during theweek of the month that contains the 12th. Harvey made landfall in South Texas on August 25. Flooding in the Houstonarea kept some business shuttered for weeks. Irma struck South Florida on Sunday, September 10, disrupting businessesthroughout the South Atlantic region right before the payroll survey data was collected. If there were no storm effectsto talk about in the September payroll data, we would be discussing the huge and inexplicable 906,000 worker increasein the household survey of employment. Strange spikes occasionally happen in the household survey for no economicreason. The result of the huge increase in the household employment survey for September was a drop in the unemploymentrate to 4.2 percent, despite the weak payroll numbers for the month.
In contrast to the quirky labor data for September, both the ISM Manufacturing Survey and the ISM Non-Manufacturing survey had very good results for the month, increasing to 60.8 and 59.8, respectively. These two surveyscapture economic conditions for the bulk of the U.S. economy. Near-60 readings for both surveys at the same time is arare occurrence that bodes well for the U.S. economy in the second half of 2017.
As Janet Yellen completes her term as chairwoman of the Board of Governors of the Federal Reserve, monetarypolicy is evolving as expected. At the conclusion of the September 19/20 Federal Open Market Committee meeting, the Fed announced that they were keeping the fed funds rate range steady at 1.00 to 1.25 percent. They also announcedthat they would begin to gradually reduce the amount of maturing assets that they would reinvest. By not reinvestingmaturing assets, the Federal Reserve will allow its $4.5 trillion dollar balance sheet to shrink at a controlled and predictablepace. Not reinvesting by the Fed also marginally shifts the demand curve for Treasury bonds, slightly lowering bondprices and increasing bond yields. The Fed will keep the fed funds rate stable through the upcoming October 31/November 1 FOMC meeting. We look for one more fed funds rate hike this year on December 13.
Fiscal policy is also in play. On September 27, the Trump Administration released broad details of its tax reformpackage. Key proposals include a reduction of the corporate tax rate from 35 to 20 percent and the simplification of thepersonal tax code. There are many economic positives that may come with tax reform, including encouraging the repatriation of significant overseas corporate assets, encouraging business investment and encouraging spending by households. However, the political climate is challenging and the constrained fiscal realities mean that there is limited maneuveringroom in budget negotiations. The final details will emerge as a reconciliation budget agreement later this fall.
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