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US Manufacturing and Spending Seen Taking Short-Term Hit From Hurricane Harvey’s Impact

The global manufacturing recovery should keep up its momentum, but disruptions caused by Hurricane Harvey will warp August and September output data, according to an analysis by IHS Markit U.S. economist Michael Montgomery.

Supply disruptions will rock oil refining that accounted for 3 percent of industrial production last year, and the chemical industry, responsible for 12.4% of industrial production in 2016, Montgomery said Friday.

Many chemical plants were forced to derail operations due to flooding and damage caused by Harvey, which registered as the largest rain event in the country’s history. Invista stopped production at its Victoria plant that primarily manufactures nylon 6,6 intermediate chemicals that are used in the manufacture of its consumer brands Stainmaster, Antron and Cordura and Ascend Performance Materials was also forced to stop nylon chemical production at its Chocolate Bayou facility in Alvin, Texas.

“Those two industries are dominant in Harvey-flooded areas,” he said. “Storm damage had limited time to drag down August, but recovery will be sluggish in the September numbers; if industrial production was available twice per month rather than monthly, the first half of September would be truly ugly.”

Port Houston was back in action on Friday after being shut down for a week by the massive storm. The two area airports were also reopened and UPS and FedEx, which has suspended operations throughout most of southeast Texas during the storm, were said to be slowly resuming deliveries where possible.

[Read more about Hurricane Harvey’s Impact: Logistics Nightmare Follows in Harvey’s Wake]

The ISM purchasing managers’ index has been rolling along since late 2016. The first seven months of this year averaged 56.4, but August’s showing was the best since April 2011. A reading of greater than 50 signals increased economic activity, less than 50 indicates a contraction.

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The August ISM index for manufacturing surged to 58.8 from 56.3 in July on gains in employment, supplier deliveries and inventories. The orders score eased 0.1 point to 60.3, while production rose 0.4 point to 61.0. New export orders sagged 2.0 points to a still-strong 55.5.

“The manufacturing world is in good shape headed into the last third of 2017, but Mother Nature is demanding a breather,” Montgomery said. “The ISM manufacturing report for August is more a portrait of what might have been than the reality that will happen, thanks to Harvey. The important message is that the normal rules do not apply in the short term when events of this magnitude happen in key parts of key industries. September manufacturing could have been a contender, instead it will throw in the towel. The fourth quarter should see solid gains plus a recovery bump to growth.”

The hurricane is likely to slow consumer spending in the third quarter, as well, according to Chris G. Christopher Jr., executive director for U.S. economics at IHS Markit.

Income finally made a comeback in July after a roller-coaster ride since March, Christopher noted. Personal income jumped 0.4% in July after a flat June, while wages made significant gains for the second month in a row. Disposable income rose 0.3% after a flat reading in June.

IHS now expects real gross domestic product growth in the third quarter—previously estimated at around 3.5%—to be cut by 0.5 to 0.6 percentage points. Fourth quarter growth—previously estimated at around 2.4%—will likely be bumped up by a few tenths of a percentage point. The Hurricane Harvey impacts are taking about 0.3 percentage points off of real consumer spending growth in the third-quarter, with IHS now predicting third quarter real consumer spending growth outlook at 2.7% to 2.8%.

“Currently our back-to-school retail sales outlook is standing at 4.1% greater than last year’s figures,” Christopher added. “The impact of Hurricane Harvey on this year’s back-to-school retail sales growth was been cut by 0.3 percentage points. Still, we expect this year’s back-to-school retail sales to out preform 2016 and 2015.”