The Economic Truth of Natural Disasters
The Gulf Coast couldn’t catch a break in August 2017. September promises the same fate for Florida.
After dumping trillions of gallons of water on Texas, estimates noted the storm could cost as much as $160 billion, or the combined costs of Hurricanes Katrina and Sandy. Hurricane Irma could easily rival or surpass the devastation from Harvey.
“Moody’s Analytics estimates the storm will result in $30 billion to $40 billion in property damage and about $7 billion in lost economic output, as most restaurants, hotels, and retailers stay shuttered,” according to USA Today. “About half the output should be recovered within a couple of months but it will take about two years to restore the damaged property, says Moody’s Chief Economist Mark Zandi.”
It’s so bad analysts said it could have shaved up to 8/10th of 1% off U.S. GDP.
Others said it could be far more. In fact, with a projected gross output of $441 billion for 2017 that represents 2.4% of the nation’s economy. "Business leaders and the Federal Reserve, major banks, insurance companies, etc. should begin to factor in the negative impact this catastrophe will have on business, corporate earnings and employment," said Dr. Joel Myers, founder and chairman of AccuWeather. "The disaster is just beginning in certain areas."
Of course, you’ll also hear that such storm events can boost GDP, too.
You’ll hear that rebuilding efforts will provide an overall boost for contractors, manufacturers an overall GDP. According to Don Rissmiller, Strategas, as quoted by Yahoo Finance.
“Flood insurance is unlikely to provide much of a cushion for individuals. The business situation could be more nuanced—increased spending on essentials is set to crowd out other purchases (eating out, etc). Rebuilding will be a significant story, though monthly data (especially durables) will likely be volatile. Replacement spending will boost economic growth, though it’s not good for wealth.”
But that’s not true at all. In fact, according to Market Watch, such events instead contribute to a negative supply shock.
“Normal production and distribution channels are destroyed or disrupted. Producers have to find less-efficient (i.e. more expensive) ways to transport their goods. The net effect is lost output and income, and higher prices,” they note. “Economics is about the allocation of scarce resources. A natural disaster commandeers those scarce resources in an effort to return to the status quo ante. Any boost to quarterly GDP from an increase in residential and non-residential fixed investment is an arithmetic expression of current activity, not a reflection of the wealth of a nation.”
On Wall Street, the reaction seemed muted.
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One of the reasons for that is the fact that systemic problems that can rippled across global financial markets appear remote, notes the New York Times.
In theory, a natural disaster could deliver such severe losses to insurers, banks or other financial institutions as to cause broader economic problems. There’s not much evidence of that happening because of Harvey for a few reasons. Home insurance policies generally do not cover flooding, which means the severe flood damage should have less impact on insurers’ payouts than you might expect. For many individuals, the financial losses from flooding can be devastating. But the possibility of the kinds of systemic problems that ripple across global financial markets appears remote. Insurers’ balance sheets are relatively strong after years without mega-catastrophes demanding particularly enormous payouts.
Anyway you look at this situation it was a disaster for all involved. There are no winners here.
At the time, we could only hope the broader economic impact is less than forecast.
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