The Economics of Hurricanes

Tuesday, September 19, 2017

I realize that this is old news at this point and most of us probably have hurricane fatigue after the 24/7 news coverage of the events in Florida recently, but isn't it amazing how news about the hurricane that hit south Texas vanished once the new shiny object hit the media channels?

It's been five years since Hurricane Sandy, nine years since Ike, and 12 years since Katrina. We now are seeing the personal tragedy, pain, suffering, and loss that are always left in the wake of these storms.

I wanted to take a look at history to see how massive weather events affect the economy and markets. There seems to be two opposing views. Some experts believe the damages of these events will cause a recession. Some take the other side and believe the rebuilding efforts will help grow the economy.

If you look at the historical data from the previous storms mentioned above none of them caused a recession and none of them caused a dramatic uptick in GDP. Real GDP grew 4.9 percent at an annual in the first quarter of 2006 after Katrina, but never accelerated above 3 percent in the first two quarters after Sandy.1

For the six- and nine-month periods before and after these storms, the rates of growth were similar and the data supports that U.S. growth grows with the normal statistical noise when there are no major weather events.

I have no doubt that when you look at the number of cars that were under water in south Texas that we will probably see an uptick in the number of car sales in the near future.

One may think that is good news for the automakers whose sales numbers have been dropping in recent quarters. One estimate indicates that more than 500,000 automobiles were destroyed by Hurricane Harvey and this does include the impact of Hurricane Irma.2

We will definitely see an increase in automobile sales in the next few months as individuals work out the issues with insurance companies. However, the other side needs to be looked at because the reality is that demand will be pulled forward in the next quarter which will probably cause a drop in the auto numbers in the 1st and 2nd quarters of next year.

The other thing I hear is that the Federal Government will be throwing all sorts of money at south Texas and Florida as part of the rebuilding effort. Yes, that will happen, but let me take you back to 2009. President Obama called his stimulus bill the "largest new investment in our nation's infrastructure since Eisenhower built an interstate highway system in the 1950s."

The stimulus bill that was passed in 2009 was $787 Billion in total and only $48 Billion went toward transportation infrastructure. The only evidence I saw of that spending in the Kalamazoo area was that we now have mile marker signs every tenth of a mile on I-94. I guess the sign guy made some money, but I am not sure how any infrastructure was improved.

Don't get me wrong; there is no doubt that if you are in the building trades (siding, roofing, construction, modular homes, etc.) the work that will be required to attempt to make people whole will be ongoing for several years. However, when I talk to people that work in those current sectors the biggest problem that existed before the disasters was the availability of skilled workers to meet the current demand.

The estimates were trending towards a 3.5 percent GDP rate for our current third quarter before it ends. It will probably end up being a little lower because of the initial unemployment and lack of economic activity in the affected areas. Once the government starts funneling money and the insurance companies pay claims my expectation is that GDP will get back to the path that it was on before the hurricanes.3

1 - Bureau of Economic Analysis
2 - First Trust Economic Advisors
3 - The opinions expressed are subject to change with economic and market conditions. They are not meant as investment advice. Forward looking statements and market forecasts cannot be guaranteed and may not come to pass.


Wesley Lentz Wesley Lentz

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