Wall Street is warning about the potential “sizeable impact” Hurricane Irma might have on U.S. economy. To be sure, hurricane-related damage is already impacting our own GDP estimates. But will it break the bullish trend that’s been driving the U.S. stock market to new all-time highs? We say no. As Hedgeye CEO Keith McCullough writes in today's Early Look:
“Instead of worrying about Trump’s tweets, “valuation”, North Korea, etc., we’ve been trying to warn US Growth Bears about one very basic concept. And that is US GDP #Accelerating, throughout 2017. We’ve had 4 straight quarters of that. Will we have a 5th?”
Despite two hurricanes hitting us hard, McCullough explains why we should have a 5th consecutive quarter of year-over-year acceleration for the third quarter’s US GDP release. Here's our updated US GDP view for Q317:
- Q3 GDP ticks down to +2.42% year-over-year growth (vs. +2.2% in Q217);
- Q3 GDP ticks down to +3.63% on a q/q SAAR basis (vs. +3.0% in Q217)
In other words, don't freak out. U.S. economic growth has accelerated from the 2Q16 low of 1.2% to 2Q17's 2.2%. Our estimate of 2.4% for the third quarter implies a continuation of this trend.
And while our GDP estimate for the third quarter was revised down slightly (more on why below), we would caution investors who read too deeply into Wall Street's warnings for "sizeable" impacts on economic growth, like the below from The Street:
"Hurricane Irma could have a "sizeable" impact on economic growth, Goldman Sachs analysts cautioned Tuesday, even as estimates of the storm's damage have been significantly downgraded thanks to slowing winds and a late change to its path up the Florida coast... The bank noted that it lowered its third quarter growth projections for the U.S. economy by 0.8 percentage points to 2% but could see a further impact if damage figures were to escalate."
If we're right and U.S. GDP comes in at 2.42% in the third quarter, that would mark the fifth consecutive quarter of accelerating economic growth. So the trend that continues to drive equity markets higher remains intact. Furthermore, the headwinds that are currently weighing down GDP become tailwinds into the back half of the year.
Industrial Production Down
Consider what Hedgeye CEO Keith McCullough and U.S. Macro analyst Christian Drake wrote previously on last week's U.S. Retail Sales and Industrial Production numbers:
"With a hurricane in some of the numbers, this was not a good week for US economic data, in sequential (month-over-month) rate of change terms. Both US Retail Sales and Industrial Production Growth decelerated to +3.2% and +1.5%, year-over-year, respectively (see y/y IP growth in the chart below – it’s been a great run)."
Expectedly, Utilities Production headlines the backslide within the Industrial Production data, dropping -5.4% month-over-month and -7.8% year-over-year. Basically, hurricane-related electricity production was hit with the power out… a dynamic that will persist next month. But as McCullough and Drake write, "Favorable cycle compares through November should continue to support positive – albeit off the recent rate of change peak – growth in the face of the distortions."
CONSUMER CONFIDENCE UP
Meanwhile, as McCullough and Drake point out, Consumer Confidence headed higher last week...
"Prelim Univ of Michigan for Sept = 1st reading that absorbs the cumulative impact of Charlottesville, Debt Ceiling/Other Political Discord and Hurricane. While the headline dipped -1.5pts on a fall in Expectations, the “Current Conditions” and “Current Financial Position” subindices (again) made new, higher cycle highs. 1Y/5Y Forward inflation expectations tick higher also.
People care about their living reality and what impacts them tangibly on the day-to-day. Exogenous events and the ebb and flow of social mood matter but mostly as an amplifier or after they hit a critical treshold (i.e. they are nonlinear). Proximate economic conditions remain principal."
While hurricane-related damage will weigh on GDP in the near term, the trending acceleration in U.S. growth remains firmly intact. This trend will provide a backstop during inevitable selloffs in the stock market. Spotting U.S. growth accelerating is the primary reason we've been telling subscribers to buy the dip in domestic equities for about 10 months now. And we're sticking with that call here.
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