It seems to me the economy is acting strangely – and now the USA must deal with the aftermath of Hurricanes Harvey, Irma and Maria.
The Federal Reserve stated in their 20 September meeting statement:
Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.
“Past experience” is worthless in the New Normal. Too much of the population is older, and they are NOT going to rebuild what they lost (likely will rebuild smaller). And the millennials likely owned squat – and lost relatively little except for personal effects. All these storms did was make the average Joe poorer – either through lost income or loss of property (or both). The medium and long term affects of these hurricanes will be lower spending after the initial replacement cycle passes.
The Fed is good at making statements appear factual but never seem to come true. Inflation is currently below the Federal Reserve’s target rate and the Fed has been saying words similar to these since the Great Recession:
Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.
For 10 years we have never reached the medium term – and the only way the USA would ever reach the inflation target is as a result of supply chain interruptions.
While Congress argues over repealing portions of Obamacare, everyone should note that inflation in health care is now running below the inflation rate of the CPI-U.
How did this happen? Is the fact that the boomers are needing more medical care causing more of an assembly line situation? Obamacare (and those on Medicare who opted for private plans) put Americans in the hands of the insurance companies. Did the insurance companies start driving down the costs of the health care providers? Don’t know if this is good or bad – only time will tell.
How Can The Consumer Spend More?
And then there is my favorite graph of the ratio of spending to income which has been very elevated since September 2016. There have been only three extended periods in history where the ratio of spending to income has exceeded 0.92 (the months surrounding the 2001 recession, from September 2004 to the beginning of the 2007 Great Recession, and since September 2016).
Seasonally Adjusted Spending’s Ratio to Income (an increasing ratio means Consumer is spending more of Income)
Relate the above graph to the BILLIONS of dollars losses in the private sector. This is a loss of net worth. How can this loss be rebuilt in a world that only 3.5% of disposable income available for rebuilding net worth.
The saving rate is near post-WW2 lows – and the losses due to the hurricanes are almost equal to a full year of savings to the entire country. And most of us know that the median person is not saving 3.5% of their income.
I do not see much good which will develop in the medium to long term due to the recent hurricanes.
My usual weekly wrap is in my instablog.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.