How 2 Hurricanes Are Wrecking GDP Growth Hopes

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The current administration wants U.S. gross domestic product (GDP) to be at least 3%. It feels like it has been ages since that sort of growth was seen. Now we’ve had two major hurricanes come up back to back, with direct hits in Texas and Florida. While storms may drive a frenzy of buying goods tied to the home, the evidence has mounted that two major storms are going to hurt GDP and industrial production.

In Friday’s economic reports, industrial output was down by a sharp 0.9% in the month of August. Some negative numbers have already seen, like the sharp jump in jobless claims, but this drop in industrial production was the biggest in about eight years — back when we had that little thing called the Great Recession. And August’s decline is after six consecutive monthly gains.

Hurricane Harvey is the primary culprit to the drop as oil refining was interrupted, as well as the same spillover impact for the chemicals and plastics industries. The Federal Reserve has estimates that Harvey’s impact in Texas and Louisiana lowered industrial production by about three-quarters of a point.

Mining production, which includes oil and gas drilling, was down by 0.8%, as the hurricane acted to shut many drilling efforts temporarily.

Storms are one thing. But 0.9% having backed out three-quarters of a point still implies that production would have been lower. Or does it?

Where this gets complicated is that manufacturing activity had improved around energy and has seen some improvements now that the U.S. dollar has weakened from its peak. The Fed indicated that manufacturing production was down by 0.3 points in August. The Fed’s view is that growth would have been 0.5% had Hurricane Harvey not been a factor.

One boost was the auto sector’s gain in August. That’s a good thing, based on the preliminary estimate of flooded out cars in Texas, Louisiana, Florida and elsewhere.

One sad impact is that this drop in industrial production will prompt many economists to cut GDP forecasts for the third quarter. Hurricane Irma likely will act as a drag against September’s economic readings. Add all that up and we are likely to have two major drags in the second half of the third quarter of 2017.

There is one more consideration about industrial production on top of mining (drilling). Utility output is also measured, and it turns out that the output from utilities was down by 5.5% due to mild temperatures throughout the eastern United States. And if we look forward to the September readings for utilities, Texas enjoyed a cool 10 days at the start of September, while millions of utility customers in Florida may not have power all month.

Now we have to factor in how weaker retail spending trends in August are a drag. Roughly two-thirds of U.S. GDP is based on consumer spending. That’s bad news “times two” for third-quarter GDP. The Fed said of August’s weak report:

The output of mining fell 0.8 percent in August, as Hurricane Harvey temporarily curtailed drilling, servicing, and extraction activity for oil and natural gas. The output of utilities dropped 5.5 percent, as unseasonably mild temperatures, particularly on the East Coast, reduced the demand for air conditioning. … At 104.7 percent of its 2012 average, total industrial production in August was 1.5 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.8 percentage point in August to 76.1 percent, a rate that is 3.8 percentage points below its long-run (1972–2016) average.

Now we know at least a good portion of the bad news. If there is any good news, it is that all this temporary interruption and weakness should be followed by a snapback and surplus for the fourth quarter of 2017. The end result is that it will seem impossible that growth for all of 2017 will be at 3% or higher.