Tuesday, 26 of September of 2017

Economics. Explained.  

Hurricane Economics

September 8, 2017

Hurricanes are currently dominating the headlines and for good reason.  For those in the path of a major hurricane the impact is devastating between winds, storm surge, and flooding.  The images from Houston and the Caribbean islands are disturbing.  As this article is being written Miami is in the bullseye.  In our hometown, Charleston, S.C. the topics of discussion are all hurricane-related – evacuation, the inability to find water, gasoline stations running out of fuel, etc.  Jim Cantore has not arrived yet.  He is still in Miami.  Clearly, parts of the country have been clobbered and others will soon suffer a similar fate.  But will this trigger a recession for the economy as a whole?  Will the post-hurricane rebuilding effort significantly boost GDP growth in the quarters ahead?  The answer to both questions is no .  Here is what history suggests.

The two most recent hurricanes that might provide some guidance are Hurricanes Katrina and Sandy.

Katrina slammed into the Gulf Coast on August 29, 2005, devastated New Orleans and the surrounding areas in Louisiana, Alabama, and Mississippi.  While the storm itself did significant damage its aftermath was catastrophic as levees were breached which led to massive flooding.  Hundreds of thousands of people were displaced.  The hurricane caused $108 billion in damage.  Theory suggests that Katrina must have had a huge negative impact on GDP growth when the storm hit, followed by a rebound during the re-building.  But did that happen?  In the four quarters prior to the storm GDP growth averaged 3.4% (3.6%, 3.5%, 4.3%, and 2.1%).  The economy was humming along nicely.  What happened in the third quarter of 2005?  3.4%.   It is hard to see any negative hurricane impact.  What about the fourth quarter?  2.3%.  A little softer than in other recent quarters perhaps but nothing of consequence.

What about the next four quarters?  Wasn’t there a big rebound from the rebuilding effort?  Not really. GDP growth averaged 2.4% (4.8%, 1.2%, 0.4%, and 3.1%).  The 4.8% growth rate in the first quarter of 2006 may have incorporated a post-storm rebound, but nothing beyond that.

Why wasn’t there a more noticeable effect from Katrina?  Perhaps because the storm did not hit any major cities.  New Orleans was, at that time, a city of about 500,000 and was the country’s 50th largest city.

Hurricane Sandy worked its way up the entire length of the east coast between October 26 and October 29, 2012 inflicting damage in every state along the way.  The National Hurricane Center estimates that Sandy caused $71 billion of damage.  The most significant problems occurred along the New Jersey coast and in New York City when the East River overflowed its banks and flooded seven subway tunnels.  What happened to GDP growth?  In the four quarters prior to the hurricane GDP growth averaged 2.4% (4.5%, 2.7%, 1.9%, and 0.5%).  In the fourth quarter GDP of 2012 growth was 0.1%.  The negative impact on GDP growth was more noticeable.

In the subsequent four quarters growth averaged 2.7% (2.8%, 0.8%, 3.1%, and 4.0%).  The re-building rebound is very hard to decipher.

So what about the Harvey/Irma duo?  Hurricane Harvey hit Houston which is the fourth largest city in the U.S. with 2.3 million people and a major oil and shipping center.  Miami is farther down the list in the number 42 position with a population roughly equivalent to New Orleans.  Some suggest that the impact from Harvey alone could exceed Katrina.  Add in Miami and wherever else Irma might go and total damage could reach $140 billion.

History suggests that whatever negative GDP impact we get will be concentrated in third quarter GDP with perhaps some spillover into the fourth quarter.  Currently, with about half of the data for the quarter having already been reported, estimates for the third quarter are centered on the 2.5% mark.  We are at 2.7%.  Don’t be surprised if those estimates get marked down somewhat between now and October 27 when we get our first look at third quarter growth.

The positive impact from rebuilding may harder to decipher.  We might see some modest impact in the first quarter of next year but with little discernible impact thereafter.   We currently peg first quarter GDP growth at 2.8%.  If we reduce our growth estimate for the third quarter of this year we might raise first quarter growth slightly.  Given what we know now, we expect GDP growth to average 2.7% or so over those two quarters.

The most important conclusion is that hurricanes may create some short-term GDP distortion on both the downside and then the upside.  That makes them just like any other major weather-related event – a like snowstorm.  The effect is temporary.  There is no evidence to support some economists’ contention that the rebuilding effort will significantly boost GDP growth in 2018.  If you think about it that makes sense.  The economy is at full employment with the unemployment rate at 4.4%.  To have a significant positive impact on the economy builders need to hire lots of additional bodies.  But where do they come from?  Employers are already having a hard time finding qualified workers.  For that reason the positive impact on GDP growth will be muted.  Construction firms may lure some workers to help in the re-building process, but those people will not be working elsewhere in the economy.  That may alter the composition of growth in favor of construction at the expense of growth in other sectors.  It will not change the trend rate of expansion.

In general, the macro impact will be small with some shifting in growth from one quarter to the next.  Do not buy into the notion of any long-term positive stimulus.  That is not going to happen.  The micro impact is something quite different.  You do not want to be in the path of one of these monsters.

For now stay safe.  We can worry about the GDP impact later.

Stephen D. Slifer

NumberNomics

Charleston, S.C.


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