Hurricane Rebuild to Boost Fourth Quarter Economy

ATLANTA – Despite doom and gloom estimates due to an unusually active hurricane season, third quarter gross domestic product (GDP) growth came in at 3.0 percent, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

“The loss of vehicles and damage to homes and equipment is there, as we all know,” Dhawan wrote in his quarterly “Forecast of the Nation,” released Wednesday, Nov. 15, 2017. “When we rebuild the damaged capital stock by buying new vehicles, they become additions to GDP, and these effects will linger into the fourth quarter as the rebuilding process continues on the mainland.”

U.S. GDP numbers also will benefit from the massive rebuild in Puerto Rico, as any material shipped from the mainland to the island will be counted as spending, contributing to the calculation.

The economy also stands to grow from what Dhawan has called “the Trump investment bull run.”

“In the three quarters prior to last November’s elections, investment growth was an abysmal 0.9 percent,” Dhawan wrote. “In the three quarters post-election, investment growth has been a healthy 5.9 percent.”

Oil prices around $50 a barrel, where shale oil companies are profitable, also are boosting equipment investment.

“The world economic outlook outside the U.S. is much better now, with the eurozone gaining traction and expected growth in 2018,” Dhawan said. “But a growing Europe doesn’t add to oil demand, and a slower China will result in oil prices dropping in the second half of 2018.”

Healthy investment growth helps explain monthly job growth above 150,000 jobs. Dhawan does not believe this rate of investment is enough to keep GDP growth above 3.0 percent, but he points to tax reform as a providing possible boost. However, the impacts of tax reform will not be felt until late 2018.

“Individual income tax cuts aimed specifically at middle tax brackets should pass early next year,” said Dhawan. “I expect to see an impact on spending towards the end of the second quarter in 2018. No substantial corporate tax reform will emerge from Congress due to large impacts to the budget deficit.”

Consumption demand created by income-tax cuts will have implications for future Federal Reserve interest rate hikes. Dhawan believes the Fed is poised to raise rates in December.

“Following the December rate hike, there will be a pause to see what kind of tax cuts get enacted,” the forecaster said. “When the tax-cut consumption demand starts to take hold, the Fed will begin to move in the second half of 2018.”

Highlights from the Economic Forecasting Center’s National Report

  • Following GDP growth of 3.0 percent in the third quarter of 2017, the economy will expand by 3.5 percent in the fourth quarter to make for a growth of 2.3 percent in 2017. It will then grow by 2.6 percent in 2018 and moderate to 2.2 percent in 2019 as Fed hikes have their impact.
  • After falling by 0.6 percent in 2016, business investment will grow by 4.6 percent in 2017, then rise to 5.6 percent in 2018 and 2019. Jobs will grow by a monthly rate of 174,000 in 2017, 170,000 in 2018 and 161,000 in 2019.
  • Housing starts will average 1.200 million units in 2017, rise to 1.256 in 2018 and 1.268 in 2019. Expect auto sales of 17.1 million units in 2017, 16.6 in 2018 and 16.3 in 2019.
  • The 10-year bond rate will average 2.4 percent in 2017, 2.9 percent in 2018 and 3.4 percent in 2019.