Harvey’s effects rippled through markets and politics as well as lives; mixed signals on U.S. growth; the euro tested new heights ahead of the European Central Bank (ECB) meeting.
“After decades of mass unemployment, nobody can seriously say that our labor law favors job creation.”
Harvey’s impact: Oil The storm hit Texas’ refineries and ports hardest; crude oil production, much less so. In fact, it appears that after a small upward move on August 31, West Texas Intermediate (WTI) crude prices mostly continued their gently downward move since the beginning of July despite the disaster. A possible cause: a short-term oversupply of crude oil since producers’ main customers, refineries, were forced to shut down due to flooding. One result: the spread (difference in price) between the the European and US crude-oil benchmarks (Brent vs. West Texas Intermediate) widened to $5.711 per barrel (bbl), with WTI at $46.74 vs. $52.55 for Brent.
But the refinery shutdown did slow the overall production of gasoline and other distillates, driving the cost of gasoline at the pump to a national average of $2.52, according to the American Automobile Association – a 12.9% rise since the beginning of July, following an atypical 6.3% price decline since May 31, the beginning of the heavy-driving summer season. The current oversupply of crude may decline as ports reopen for export; the addition to supply from the release of 1 million barrels of crude oil from the U.S. Strategic Petroleum Reserve might not have its intended effect, adding to a short-term oversupply rather than relieving a bottleneck.
Harvey’s impact: U.S. debt ceiling The storm adds an x-factor to the current impasse over the need to increase the government’s borrowing authority to fund government operations, payments on U.S. Treasury notes, bills and bonds, Social Security, Medicare/Medicaid and more. With Congress authorizing emergency relief, the date at which the debt ceiling is reached may get pushed closer (from October to late September) adding to the urgency of the problem. Time will tell if aid to Texas and Louisiana will be used as a political football in Congress by proponents of a higher ceiling, to extract concessions as the price of settlement; odds are this won’t happen before flood waters recede, in deference to lives lost and people displaced.
U.S. Q2 growth: Better than thought Lost in the news of hurricanes and missiles: solid news on the U.S. economy. Annualized Gross Domestic Product (GDP) for 2Q came in at a better-than-estimate 3.0% for the quarter, 0.4 percentage points higher than the Bureau of Economic Analysis first estimate a month ago. Also positive: the revisions were due to upward revisions in consumer spending on goods and business investment. U.S. personal income, after taxes, improved an inflation-adjusted 0.2% in July vs. June, and the personal savings rate as a percentage of disposable personal income was 3.5% in July and 3.6% in June.
US jobs: Just about right, sort of Nonfarm payrolls rose 156k, slightly disappointing, and the unemployment rate rose ever so slightly, to 4.4%, also a bit higher than consensus and higher than July’s figure. Not enough change to move the needle, but downbeat enough to put a slight dent into the prevailing growth narrative. The labor participation rate was unchanged, at 62.9%, as was the underemployment rate, at 8.6%. But average weekly hours worked fell slightly to 34.4 hours, and average hourly earnings rose 0.1%, vs. the July rise of 0.3%.
The euro: Runaway gain? Since the beginning of the year, the euro has risen from about $1.05 to $1.19, briefly trading above the psychologically important $1.20 on August 29th. Though strong European economic figures are behind much of the rise, it’s not just a function of the euro rising –the U.S. dollar has come under pressure for reasons all its own. But the relative rise has put the European Central Bank in a bind for this week’s monthly meeting; any move to back off its €60 billion monthly bond buying program could generate short-term volatility. Acknowledging the issue, the ECB has been hinting that its previous plan to start backing off in September might not be on.