Mnuchin Warns On Debt Ceiling; Let’s Compare Harvey To Katrina

Ok, so we all know what the Hurricane Harvey “silver lining” is, right?

If not, you can read all about it here, or you can simply extrapolate from this Sunday soundbite from Mnuchin who spoke to Fox News:

MNUCHIN SAYS HARVEY AID SHOULD BE TIED TO RAISING DEBT LIMIT

— Walter White (@heisenbergrpt) September 3, 2017

Here are the full highlights from Axios:

Treasury Secretary Steven Mnuchin told “Fox News Sunday” that Congress must tie Harvey recovery funding to a clean debt ceiling rise, or else the money intended for Harvey might not arrive.

“Prior to Harvey I’ve said, you know, we have enough funding to go through the end of September… with Harvey its moved the situation up earlier,” he said.

• On whether Trump’s threat to shut down the government over the border wall is out the window: “I can’t really comment on if it’s out the window or not out the window,” but priority now is Harvey.
• On whether tax reform will blow a hole in the national debt: “We want to make sure we can pay for things, but the way we’re going to pay for things is with economic growth.” He said he thinks growth will likely be higher than the models predict.
• So will it be revenue neutral? “What we’ve said is we believe in dynamic scoring.”

In other words: not only has Harvey made it more likely that the debt ceiling will be raised simply by virtue of the bad optics for anyone who opposes a bill with disaster relief attached to it, but also because it makes the funding crunch more acute, rendering the situation even more urgent than it already was.

If you’re not in Texas or if you’re just a cold-hearted, trader cynic who only worries about your P&L, then that’s probably all you care about here, because the sooner the debt ceiling gets raised, the sooner you can cross “technical U.S. default” off your “tail risk” list.

Of course as is usually the case with catastrophic natural disasters, it’s not all good news.

“Early damage estimates on Hurricane Harvey range from large hurricanes such as Andrew and Sandy ($53bn and $76bn, respectively) to as high as Hurricane Katrina ($160bn in 2017 dollars),” Barclays writes, in a new note assessing the economic impact from the storm. They continue: “[If we assume the latter], losses of this amount would put the costs from Harvey at or above every hurricane to strike the US in recent decades.”

(Barclays)

Obviously, trying to estimate the damages and the costs is an exercise in futility at this juncture (probably better to call it a “fool’s errand”). And besides, “damages” don’t translate directly into “economic costs.” Plus, there’s a kind of give-and-take here for the economy where that which is lost in the lead up to the storm and in the storm itself, is to a certain extent regained in the aftermath because after all, someone has to clean up.

So probably the best we can do in terms of assessing the impact on widely followed economic indicators is simply to observe how those indicators behaved during previous storms and use Katrina as a best-guess proxy. Here’s Barclays again:

Disruptions to the flow of income (eg, GDP) occur in the short run because of the halting or trimming of production of some industries and through declines in compensation of employees in that industry. Industrial production, jobless claims, and payrolls may all reflect disruptions to the flow of income. However, these may be offset to some degree by increased activity in cleanup, repair, health care and other social assistance. In addition, retail sales and consumption may be boosted prior to a storm as households improve their preparedness, which may then be followed by declines in each immediately following the event. The latter effect may be larger, depending on how much and how long activity is disrupted after the hurricane. Eventually, retail sales and consumption spending are likely to pick up as the situation normalizes.

And here are the charts:

(Barclays)

Clearly, the old “the bigger they are” adage applies here, and this one was pretty… well… pretty “bigly.”

As Barclays goes on to say, those visuals represent “a simple event study” but again, that’s probably the best we can do here.

On inflation, the bank notes that if you look at gasoline futures and extrapolate, what you come away with for CPI inflation is “a 0.1- 0.2pp rise in headline inflation through November, then a reversal thereafter.”

So… some artificially inflated prints in the months ahead of the December Fed meeting and a prompt crash back to reality right as the committee is considering whether to try and squeeze in another hike. Perfect.