Harvey’s aftermath: How might the U.S. economy fare?

In today’s edition of Market Week in Review, Consulting Director Sophie Antal Gilbert chatted with Kara Ng, senior quantitative investment strategy analyst, about the anticipated economic impacts to the U.S. from Hurricane Harvey, which caused untold destruction in Texas and Louisiana earlier this week.

Economic and financial market implications of Harvey

“Our hearts go out to everyone who was directly or indirectly impacted by this event,” Ng said. She then noted that from a market perspective, natural disasters typically cause volatility in economic data—but their overall impact is muted. She expects this to be the case with Harvey as well. Initially, Ng said, economic activity may likely take a hit with a downward dip in jobs, consumption and production—but ultimately should bounce back once the rebuilding process gets underway.

Harvey will also impact energy prices, Ng said, noting that the storm took out about 20% of the country’s refining capacity. This mean that there’s a lower supply of gasoline, which in turn drives up the price of gas, diesel and jet fuel. With this in mind, Ng expects U.S. headline inflation to exhibit more volatility in the coming months.

Tepid U.S. jobs report numbers for August

Switching to the August U.S. jobs report, which was released by the Labor Department today, Ng stated that in her view, the numbers were disappointing, but ultimately not a game changer. All told, 156,000 jobs were added in August, she said—still a healthy amount, but below the consensus expectations of industry analysts. In addition, Ng said, downward revisions were made to job numbers from prior months, while the increase in average hourly wages was weak and range-bound.

“Overall, this report reiterates the theme of a strong U.S. labor market with lackluster wage growth,” Ng opined. In her and other Russell Investments strategists’ view, this does not change what they expect from the U.S. Federal Reserve (the Fed) for the remainder of 2017:  balance sheet normalization, beginning later in September, and a freeze on Fed funds rate hikes through December. She went on to add that upcoming jobs reports could be harder for the Fed to interpret, due to impacts from Hurricane Harvey (August’s report was largely completed prior to the storm’s landfall). “It’s possible that we could have a disruption to the labor market before a rebound,” she noted.

Euro on a hot streak

Transitioning to the topic of currency, Ng noted that the euro has strengthened by roughly 15% in relation to the U.S. dollar since the start of 2017, according to data from the U.S. Dollar Index. The euro still has additional room to strengthen, Ng said, pointing to strong economic data trends across the Eurozone in addition to the region hitting a 10-year high in economic confidence during August, as measured by the European Commission‘s Economic Sentiment Indicator.

However, Ng said, a stronger euro does have a negative impact on European equities. This is because, from the point of view of a consumer outside the Eurozone, a stronger euro makes European goods more expensive. This, in turn, means that multinational firms in Europe who sell internationally could see their sales suffer. “Given that an appreciating euro hurts equities, the European Central Bank has an incentive to talk dovishly to mute this strengthening currency,” she concluded.

Watch the video.