U.S. Economic Growth Hampered By Recent Hurricanes -- 2nd Update

Hurricane damage and an unexpected drop in consumer spending have softened the economic outlook just as it appeared to be gaining momentum.

A pair of severe hurricanes -- Harvey, which hit Texas and Louisiana in late August, and Irma, which struck Florida in early September -- are set to jumble economic indicators this fall.

Early evidence came Friday when the Federal Reserve reported that U.S. industrial production dropped a seasonally adjusted 0.9% in August from the prior month, its largest decline since the 2007-09 recession. The Fed said Hurricane Harvey was responsible for most of the decline by depressing oil drilling, petroleum refining and other industrial activity.

But slower growth in certain key pockets of the economy began months before the storms. Spending at U.S. retailers fell 0.2% in August, and sales earlier in the summer were less robust than previously estimated, the Commerce Department said Friday. Retail sales increased a revised 0.3% in July, down from an originally reported 0.6% increase. Sales fell in June, compared with a prior estimate of an increase.

"It's clear given this morning's revised numbers consumer spending won't be as buoyant in the third quarter as it was in the second despite high consumer confidence and record-high stock prices," said Scott Anderson, chief economist at Bank of the West.

Consumer spending is the main engine of the U.S. economy, accounting for more than two-thirds of total economic output. Growth in this segment of the economy has remained surprisingly tepid given soaring consumer sentiment.

When asked to assess current economic conditions, rather than expectations of future conditions, Americans' sentiment rose to the highest level since November 2000, the University of Michigan said Friday.

The hurricanes also caused everyday Americans' outlook to dim, but not by much. An index of consumer sentiment slipped 1.5% to a reading of 95.3 in September, partly because of concerns about hurricane damage.

"Renewed gains in incomes as well as rising home and equity values have acted to counterbalance the negative impacts from the hurricanes," said Richard Curtin, the survey's chief economist. "Given the current resilience of consumers, recent events are unlikely to derail confidence."

The Commerce Department said it couldn't isolate the effect of Hurricane Harvey on retailers last month. The agency received mixed indications on the hurricane's effects on retail activity, with some firms reporting a drop in sales.

Weak auto sales were a leading drag on overall retail sales, but excluding this volatile category, sales were up only 0.2% last month.

Sales in August were soft in most categories. But gasoline-station sales rose 2.5% in August from the prior month, reflecting higher prices at the pump. Gas prices surged in the wake of Hurricane Harvey, as Texas refineries temporarily shut down, but were up even before Harvey made landfall.

Sales were uneven across other categories last month. They nudged up at home furnishings stores and grocery stores. They declined at building-material and garden stores and department stores, even though hurricanes typically translate into increased spending on preparations. Meanwhile, sales at non-store retailers, mostly online-shopping outlets, fell 1.1% in August. That was the largest decline for the category since April 2014.

In addition to month-to-month volatility, weakness in online sales could be partly due to low inflation, as retailers lower prices, but struggle to drive traffic. The weak August reading also likely reflects some payback from Amazon Prime Day, which boosted online sales in July.

Ben Leubsdorf and Josh Mitchell contributed to this article.

Write to Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

September 15, 2017 12:55 ET (16:55 GMT)