Positive Economic News Lost in the Headlines

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

In employment-related news:

  • In August, non-farm payrolls rose 156k – slightly below consensus estimates – pushing unemployment back up to 4 percent.
  • This week, jobless claims jumped an unexpected 62k because of Hurricane Harvey’s strike on Houston.

Outside of employment:

  • Productivity is up 5% since last quarter, and unit labor costs remain tame, supporting profit margins.
  • ISM manufacturing and non-manufacturing surveys rebounded sharply after weakening in July.
  • Consumer confidence remains near all-time highs.

These mostly positive economic data points have been lost in the headlines, as the North Korea situation escalates and hurricanes plague the southern United States.

Geopolitical pressures between the U.S. and North Korea have once again escalated. While these events can elicit fear, history tells us that geopolitical events rarely have an enduring impact on the markets. One Korea-related risk to watch is the potential fallout between China and the U.S. – any tariffs the U.S. imposes on China could lead to a trade war affecting the global supply chain.

Back home, hurricane season has returned with great force. Hurricane Harvey left Texas with catastrophic inland flooding. Hurricane Irma brought 185 mile-per-hour winds and massive evacuations. Another hurricane closely follows. While the destruction has yet to be totaled, the devastation will likely require billions in emergency aid and government resources.

Historically, hurricanes have caused significant damage, but have not significantly affected the equity markets, which tend to reflect broader national economic conditions. Moreover, comparable storms which generated large costs had muted effects on economic growth.

Figure 1: Hurricane Effects on Economic Activity

Sources: (NOAA National Oceanic and Atmospheric Administration): The National Centers for Environmental Information as of and Bloomberg, as of 9/8/2017. NOAA has yet to finalize Harvey’s (denoted with a star) cost estimates. Instead, we use a middle of the range of estimates (25 – 190 billion).

From a humanitarian perspective, natural disasters are unquestionably catastrophic. Yet historically, the impact on the overall economy has always proven temporary, and sometimes there is little or no impact on overall trends in economic activity as the initial disruption is eventually offset by a boost from construction efforts. All in all, it would likely be a mistake to alter an investment program in response to events such as these.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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