U.S. economic growth will take a mild hit in the current quarter from Hurricane Harvey that slammed into Texas, but the outlook for the coming year remained steady in the latest Reuters poll, suggesting lost output will likely be recouped.
U.S. economic growth will take a mild hit in the current quarter from Hurricane Harvey that slammed into Texas, but the outlook for the coming year remained steady in the latest Reuters poll, suggesting lost output will likely be recouped. Harvey was the most powerful storm to hit Texas in more than 50 years, killing over 60 people and displacing more than 1 million citizens. It also forced a temporary closure of refineries and the governor of Texas said the damage was around $180 billion.
Asked about the impact of Hurricane Harvey on economic growth in the current quarter, the median forecast from 48 economists who answered an extra question was for a 0.3 percentage point hit to seasonally adjusted annualised growth. But the impact was expected to be short-lived according to economists, who responded to the survey Sept 7-12 before and as another powerful storm, Hurricane Irma, ripped through the Caribbean and then Florida, killing more than 60, displacing and leaving millions of households without power.
Previously, major hurricanes like Katrina in 2005 and Sandy in 2012 had cost more than half of the GDP growth rate for the respective quarters the storms hit. But data following those storms also suggest that the U.S. economy was able to add solid job numbers and bounce back from government reconstruction efforts. “A storm of this magnitude is likely to have negative near-term effects on nationwide economic data. If flooding remains disruptive for several weeks, we would expect a drag on non-farm payrolls, but the historical experience here is mixed,” said James Sweeney, chief economist at Credit Suisse. “The effect on GDP is even more ambiguous, since many costs of dealing with the storm actually boost growth, offsetting some of the lost income and output.”
President Donald Trump’s administration struck a deal with Democrats that includes $15.25 billion in aid for areas affected by Hurricane Harvey and other natural disasters. Still, the range of forecasts suggests not everyone is convinced of just a mild dent in growth. “Hurricane Harvey could pose a sizeable drag, given the presence of high-value-added energy sectors in the Gulf Coast region and the timing of the storm’s landfall,” wrote Michael Gapen, chief U.S. economist at Barclays, in a note to clients. Barclays predicted a 1.0 to 1.5 percentage point hit, which was the most pessimistic call in the poll.
Despite that, the latest Reuters poll consensus was for the U.S. economy to expand an annualized 2.6 percent in this quarter and 2.5 percent in the next. That was up a bit from the previous predictions of 2.5 and 2.4 percent for the respective quarters in the August poll as economists had already begun upgrading their growth forecasts for the current quarter before Hurricane Harvey struck. But inflation expectations have been lowered slightly from the previous month, with the core PCE price index – the Federal Reserve’s preferred measure of inflation – not expected to reach the central bank’s 2 percent target at least until 2019.
The consensus is for core PCE inflation to average 1.4-1.9 percent in each quarters from the current through the end of next year. In the August poll, the predictions were for it to average 1.5-2.0 percent. Still, the Fed is widely expected to announce steps at its meeting next week to start shrinking its balance sheet, worth over $4 trillion.
The survey of nearly 100 economists showed the central bank is expected to raise the federal funds rate once more in the final three months of this year, to 1.25-1.50 percent. But 44 of 73 economists who answered an extra question said their conviction for another Fed rate hike this year has decreased. The remaining 29 said it had stayed the same. “We still have a December rate hike call, but recent developments are making the path to a December rate hike more narrow,” said Sam Bullard, senior economist at Wells Fargo. That lack of confidence amongst poll participants is mainly driven by the divide among Fed policymakers on the outlook for inflation and future interest rate hikes.