The hurricanes that have devastated Florida and Texas also have left some severe financial damage in their wake, but economists say the effect is only going to be temporary — setting the stage for what might be an impressive bounce-back later in the year.
Although economists acknowledge that it is still early to assess the full economic effect of Hurricane Irma, which Tuesday headed north to the Carolinas (having weakened to the status of tropical depression) after ripping through Florida on the weekend, most estimate that Irma and the sooner Hurricane Harvey in Texas will put a dent of up to 1 percent in the speed of third-quarter gross domestic product growth. Some economists have lowered their growth forecasts for the quarter to approximately two per cent annualized, a full percentage point below the second-quarter speed and nearly a percentage point below pre-storm expectations.
“August retail sales and inflation data due at the end of this week will probably reveal the first signs of the effects — worse will come over the weeks ahead, driving headline expansion down through the next quarter,” stated Karl Schamotta, director of international product and market strategy at foreign-exchange company Cambridge Mercantile Corp. in Toronto.
The storm-related growth slump may, in turn, lower the odds that the U.S. Federal Reserve will increase interest rates again this year — that could, in turn, send a hit to the U.S. dollar, Mr. Schamotta stated in a note to clients.
James Knightly, chief global economist at ING Bank in London, calculated that, based on regional gross domestic product, “Approximately 10 percent of the U.S. market is very likely to have experienced some kind of economic disruption due to the hurricanes.” The largest of these regional markets is that the Harvey-damaged Houston area, the fifth-largest metropolitan population in america and a significant electricity and shipping hub, which produces about 3 percent of national GDP.
Harvey caused widespread temporary shutdowns of oil refineries along the Texas Gulf Coast, taking up to one-quarter of U.S. gas production from commission in the peak. A lot of these centers are just just restarting this week, after two weeks offline, and several will work well below capacity for several more months yet. This not only will put a dent in the energy industry’s contribution to economic output, but it’s also strained U.S. gas supplies, causing prices to surge (thus boosting inflation) and possibly controlling broader U.S. economic action.
But beyond the energy industry, the hurricanes’ impacts are expected to weigh on a broad variety of economic indicators over the next few months. The storms and their aftermath will temporarily decrease employment, disrupt consumer spending, delay slow and manufacturing foreign trade.
“The short term effect of natural disasters is generally to diminish GDP, because economic output and demand are both impeded,” said Eric Lascelles, chief economist at RBC Global Asset Management. “At present, we are budgeting for something in the variety of a 1-percentage-point or marginally worse hit to third-quarter annualized GDP from the U.S. Likewise, the disruption of petroleum refining in the Gulf area may send the U.S. consumer price index up to 0.75 percent greater than normal in September.”
Economists in U.S. investment bank Goldman Sachs said the September employment report may be especially hard-hit from the Irma effects, because of a quirk in time. This week is the so-called “reference week” for the monthly U.S. employment report; the report is in fact a snapshot of employment as of the week that includes the 12th of every month. They stated September employment could be reduced by 20,000 to up to 100,000, depending on how much of Irma’s impact on employees lingers through this week.
Despite this negative information, many economists expect that U.S. growth could regain the majority of its third-quarter declines in the fourth quarter — in which growth could exceed 3 percent annualized. It’s quite common for economies to bounce back impressively from hurricane-induced disruptions — not as action returns to normal, but as rebuilding starts in the regions damaged by the storms. All that jealousy will require building and manufacturing production and spending to replace what was lost, which shows up as increased economic activity.
A particularly strong example of this seems set to play out in auto sales. Auto-industry services company Cox Automotive estimated that Hurricane Harvey delayed up to 40,000 new-car buys in the affected area, enough to reduce federal sales in August by up to 3 per cent. But Cox also estimated that Harvey’s flooding destroyed 300,000 to 500,000 vehicles, suggesting that a surge in demand for both new and used automobiles is on its way in Texas.
“In the Kobe earthquake through to Hurricane Andrew, history shows we frequently observe a three-stage cycle — a first period of destruction, a secondary effect when indirect costs are felt in output and employment, and a tertiary stage where spending rises sharply and economic growth accelerates,” Mr. Schamotta stated.