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September 29, 2017

The full impact of Hurricanes Harvey and Irma will not be known for months, maybe even years. Some estimates put the toll as high as $200 billion, and Harvey is expected to be the most expensive natural disaster in U.S. history – to date, at least.

Yet despite the hurricane fallout and emergence of various new risks, the U.S. economy continues to perform relatively well. Real GDP growth was revised up from 2.6 percent to 3.0 percent in the second quarter, driven by consumer spending and corporate investment – the fastest quarterly growth rate since the first quarter of 2015.

And, according to JLL’s Chief Economist, Ryan Severino, momentum was expected to carry through into the fourth quarter, though the impact of Harvey and Irma could now call that into question.

The Harvey effect

Inevitably, real estate in Houston will take a hit, though the single-family housing market was the most impacted sector. The exact extent of the impact, however, remains unclear at the moment as does Irma’s impact on markets like Miami, Tampa and Jacksonville.

“The residential sector faces the most immediate concerns, with tens of thousands of single-family residences and apartment units out of inventory for some time,” says Severino. “In the short run, this will cause demand for hotels to boom, a decline in apartment vacancy rates and a corresponding rise in apartment rents. Once rebuilding is completed however, the Houston market should return to occupancy levels seen prior to the Hurricane.”

Going forward, the Houston region’s rebuilding process will produce a slight boost to GDP given the massive amount of construction materials and other big-ticket items like home appliances and automobiles needed. However, research shows that hurricanes do not result in longer term “creative destruction.” Once the toll from Irma is calculated, the short- and long-term costs of the recent storms will be significant.

A sunnier job market

Going some way to mitigate adverse impacts from the weather, the labor market has enjoyed strong and sustained expansion, and is still adding jobs at an impressive rate. Through August, job creation averaged 176,000 net new jobs per month.

“Job growth may have been slowing over the last few years, but this remains a strong showing in the eighth straight year of labor market expansion,” says Severino. “Moreover, it is a lack of people to fill those jobs – rather than a lack of willingness to hire – that is causing the slowdown.”

Robust labor market conditions, combined with the rising stock market, are also helping sustain consumer optimism, with both consumer confidence and consumer sentiment remaining high. These positive indicators have translated into relatively strong consumer spending, which continues to outstrip wage growth.

Wage growth outlook not so bright

While the number of open but unfilled job positions reached a new post-recession high of 6.2 million at the end of June, wage growth remains stuck. Average hourly earnings were up 2.5 percent over the last year, which is unchanged since April, and the same as the earnings increase last August.

“Wage growth is anchored to inflation and productivity,” notes Severino. “The subdued rise in earnings is therefore to be expected against the current backdrop of weak productivity growth and low inflation.”

Faced with tepid wage growth, consumers have financed their spending instead by taking on record levels of leverage, and by dipping into savings (the savings rate hit 3.5 percent in July, its second lowest level since July 2008).

But as Severino points out: “Neither of those can be sustained in the longer term, which could jeopardize growth and inflation targets as we head towards year-end and beyond.”

For the Federal Reserve, the low level of wage growth paved the way for it to start normalizing its balance sheet during the fourth quarter, Severino adds. And despite low inflation, the Fed continued to signal that it at least intends to raise rates once more this year.

Click here to read more about real estate investment in the United States

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Ryan Severino

Chief Economist, JLL

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