Data-dependent FOMC facing distortions with hurricane, strikes

On September 18 the FOMC lowered the fed funds target range by an aggressive 50 basis points to 4.75-5.00 percent, beginning the process of easing restrictive monetary policy put in place to combat inflation. The accompanying Summary of Economic Projections forecast another 50 basis points of rate cuts in the remainder of 2024, essentially suggesting 25 basis points each at the upcoming meetings on November 6-7 and December 17-18. Fed policymakers were seeing the desired greater confidence that progress in disinflation back to the 2 percent inflation objective was and is happening. The labor market had rebalanced and was more-or-less back to normal for an economy in modest expansion. Recalibrating restrictive monetary policy was appropriate. A data-dependent FOMC was looking at an orderly pace of future rate cuts over the next couple of years to bring the mid-point of the fed funds target range down to the longer-run expectation of 2.9 percent.

That was before Hurricane Helene made landfall on September 26 and devasted parts of Florida, Georgia, North Carolina, South Carolina, Tennessee, and Kentucky. There were already 33,000 workers on strike at Boeing, but the ranks of strikers swelled with 45,000 dockworkers along the US East and Gulf coasts on October 1.

Most of these impacts will be relatively short-lived in the national economic data, although the regional economies are going to take longer to recover. However, in the near term, Fed policymakers are going to have a tricky time steering monetary policy through what are likely to be few months of volatility.

Discerning underlying labor market conditions will be difficult. Initial jobless claims will skyrocket in the coming weeks as infrastructure is restored at state and local government offices and claims can be filed. Most of these will be temporary, although the duration could be a few months rather than just a few weeks. Some businesses may be able to revert to work-from-home arrangements, but others will have to deal with damaged or destroyed premises and inventories. Some will never reopen, although it is possible some entrepreneurs will find opportunities in the rebuilding. Where there are corporate resources to repair and restock, it should be less of a problem. Smaller businesses could struggle to find contractors and sources of supply. In the meantime, some businesses in sectors tangential to activities at Boeing and ports may be laying off workers until those strikes are settled.

After a catastrophic event, the major monthly economic data on employment, retail sales, and the housing market typically decline in the subsequent month but a rebound in the month or two after that. Most reports for September will not be deeply affected since Hurricane Helene.

The October monthly employment report set for release at 8:30 ET on Friday, November is going to be difficult to interpret. On the establishment side, getting the survey data may be difficult as businesses in the region will still be in the early stages of recovery before the end of the survey reference period on October 12. On the household side, many households may not yet know whether the earners have a job or not. If the Boeing and ILA strikes are settled before October 12 and workers are back on payrolls at least 1 day, there will be no impact on payroll counts. If one or both strikes continue, then those workers will be deducted from payroll counts until they return to work.

The September numbers on retail sales set for release on October 17 may show spending in the days after the hurricane that includes emergency supplies like gasoline, batteries, generators, ice, water, nonperishable foods. The October report on November 15 will reflect the replacement of damaged household items like clothing, electronics, appliances, furniture, and motor vehicles, and for building materials to repair household infrastructure. In particular, new and used motor vehicles are going to be at a premium if new vehicles aren’t being offloaded at US ports in the eastern and southern states.

The housing numbers are generally geared toward new buildings, not home repair. The October data could see a decline in housing starts and permits and a burst of activity in November and December as recovery kicks in. A lot of construction work will have to wait for roads to be restored, debris to be cleared, and/or insurance payouts to arrive. New construction will require permitting. The demand for construction materials and construction workers will be high to build anew as well as for repairing existing units. Spending on non-residential repair should also be significant, although this may be an opportunity to demolish and not rebuild commercial properties that are underperforming.

The dockworkers strike could worsen the inflation numbers for a time. Supply chains will be halted with goods left on cargo ships, which in turn may be prices for badly needed items in current inventory won’t be discounted and might in some cases rise. It won’t be as challenging as during the global pandemic, but it will mean delays in replacing building materials, business equipment, household appliances, and motor vehicles.

The FOMC probably won’t change the trajectory of rate cuts that was seen in the forecasts released on September 18. Most of what will affect the data to inform their decision-making can credibly be deemed as short-term knocks on growth that will turn around fairly quickly. But it will have to do so against heightened uncertainty.