Our hearts go out to the families affected by the devastation of Hurricane Harvey. The American spirit is alive and well as was demonstrated to us in last week’s search and rescue of the flooded areas. We wish all of our neighbors in Texas and Louisiana a speedy recovery.
Stocks rose last week on generally upbeat economic data and elevated expectations for tax reform, even as Hurricane Harvey inflicted major damage throughout Texas and Louisiana (more on this below). The September employment report showed continued job creation, though the gains were at the low end of analysts’ expectations; hourly earnings (+0.1%) rose less than expected and a 0.1% increase in the unemployment rate was also somewhat disappointing. Yet, other economic data were broadly positive: the revised estimate for second quarter GDP growth increased to +3.0%; consumer confidence continued to strengthen; and, manufacturing sector growth accelerated. Furthermore, increased industrial activity in China and Europe reflect growth in both domestic spending and exports. Meanwhile, the dollar has weakened 11% year-to-date against the euro; the pullback should benefit earnings for companies with foreign operations, while also helping to increase tourism-related spending in the U.S. This week, the White House began the drive for tax reform. While lacking specifics, early efforts may focus on lowering the corporate tax rate which would improve the competitiveness of U.S. businesses. Tax reform is high on the list of priorities as Congress reconvenes next week. Finally, North Korea’s launch on Tuesday of a missile, which traveled over Japan, continued the country’s show of force. Investors, though, seem disinterested; the CBOE Volatility Index (VIX) declined to levels preceding the escalation in tensions.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Hurricane Harvey will go down as one of the worst natural disasters in U.S. history, with severe flooding and catastrophic damage to homes, businesses, and infrastructure throughout the region. Moreover, the Gulf Coast is home to a substantial portion of U.S. refining capacity; gasoline prices across the nation have jumped due to the forced closure of many refineries. Estimates of storm-related losses, which currently range from $30 billion to $100 billion, make it the most costly natural disaster of the past 40 years. However, the post-disaster recovery will provide a regional economic resurgence as construction and replacement activities begin. Likewise, the disruptions for companies with significant operations in the affected areas will impact sales and profits for the third quarter; and yet, many of these companies may benefit over time. Examples of such businesses include: car dealerships, furniture and appliances retailers, industrial maintenance companies, and construction and engineering firms. Also, the tremendous effort to rebuild these communities should generate increased demand for labor along with higher wages which would, in turn, support service-oriented industries such as restaurants and retailers. These secondary effects will begin to materialize as early as the fourth quarter and continue for some time.
For the markets, August was a relatively quiet month despite North Korea and Hurricane Harvey. As investors return from summer vacation, trading activity should increase through the end of the year. Market focus will return to legislative action, third quarter corporate earnings season, and management outlooks for 2018.
Source: Pacific Global Investment Management Company
Last Week's Headlines
- The latest report on the second-quarter gross domestic product proved to be very solid, as the GDP climbed to 3.0% — 0.4 percentage point higher than the first estimate. The first-quarter GDP increased 1.2%. Economic growth was led by increases in consumer spending, nonresidential (business) fixed investment, federal government spending, and private inventory investment. Downturns occurred in residential fixed investment, state and local government spending, and a deceleration in exports. Increased consumer spending could be related to weak price inflation. How the Fed views this information when it meets later this month could go a long way in determining whether interest rates are raised.
- The number of new hires took a step back in August with only 156,000 jobs added during the month. Job gains occurred in manufacturing, construction, professional and technical services, health care, and mining. Employment growth has averaged 176,000 per month thus far this year, down from the average monthly gain of 187,000 in 2016. The unemployment rate ticked up 0.1 percentage point to 4.4%. The labor force participation rate, at 62.9%, was unchanged in August and has shown little movement on net over the past year. The employment-population ratio, at 60.1%, was little changed over the month and thus far this year. The average workweek for all employees on private nonfarm payrolls declined by 0.1 hour to 34.4 hours in August. Average hourly earnings for all employees on private nonfarm payrolls rose by $0.03 to $26.39, after rising by $0.09 in July. Over the past 12 months, average hourly earnings have increased by $0.65, or 2.5%.
- Consumers' income and spending increased in July but not prices, according to the latest report from the Bureau of Economic Analysis. Personal (pre-tax) income increased $65.6 billion (0.4%) in July while disposable (after-tax) personal income (DPI) increased $39.6 billion (0.3%). Personal consumption expenditures (PCE) increased $44.7 billion (0.3%). Prices for consumer goods and services as measured by the PCE price index increased a marginal 0.1%, as did core (excluding food and energy) PCE.
- The international trade in goods deficit expanded to $65.1 billion in July, up $1.1 billion from $64.0 billion in June. Exports of goods for July were $127.1 billion, $1.6 billion less than June exports. Imports of goods for July were $192.2 billion, $0.5 billion less than June imports.
- According to the August survey from IHS Markit, manufacturing output was the weakest since June 2016. U.S. Manufacturing Purchasing Managers' Index™ (PMI™) registered 52.8 in August, down slightly from July's reading of 53.3. Since a reading over 50 signifies growth, manufacturing output grew in August, but at a slower pace than July's growth. The purchasing managers index from the Institute for Supply Management showed output increased last month. The August PMI® registered 58.8%, an increase of 2.5 percentage points from the July reading of 56.3%. The survey sample size for the purchasing managers' index of the ISM is generally smaller than the one used by Markit, which may explain discrepancies between the reports.
- The Conference Board Consumer Confidence Index® increased to 122.9 in August, up from July's reading of 120.0. Survey respondents were bullish on current economic conditions, while their short-term expectations were tepid. The Index of Consumer Sentiment from the University of Michigan's Surveys of Consumers increased from July's 93.4% to 96.9% in August.
- In the week ended August 26, the advance figure for initial claims for unemployment insurance was 236,000, an increase of 1,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 234,000 to 235,000. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended August 19 was 1,942,000, a decrease of 12,000 from the previous week's unrevised level of 1,954,000.
Eye on the Week Ahead
The Gulf region continues to recover from the effects of Hurricane Harvey. It will be several weeks before the economic impact of that devastating storm can be measured. July's report on international trade for goods and services is out this week. Last week's report showed that the goods trade deficit expanded in July. Despite efforts on the part of the current administration to control foreign trade, imports continue to expand at a faster rate than exports, pushing the trade deficit higher.