This hurricane season has already been a historic humanitarian disaster for the United States. Hurricane Harvey killed at least 70 people in the Southwest last week, while leaving tens of thousands more homeless, and spreading toxic chemicals through large swathes of Texas. After devastating the Caribbean, the monstrously large Hurricane Irma is poised to bring mass suffering to southern Florida.
And as you scrolled through the NOAA warnings, dispatches from flattened towns in St. Martin, and photos of frightened Floridians filling up freeways, a profanely capitalistic voice in the back of your brain whispered: “Won’t somebody please think of the markets?!”
And so, dear reader, we will.
The early consensus among Wall Street analysts is that, while Harvey and Irma are profound humanitarian disasters, they’re unlikely to become economic ones. This is because the short-term pain that the storms inflict will (probably) be offset by the bouts of “infrastructure stimulus” that the rebuilding process will inspire.
But before we say more on that, let’s dig into this hurricane season’s near-term economic effects. In the labor market, Harvey has already made its presence felt. On Thursday, the federal government reported that initial jobless claims had surged by 62,000 — the largest single-week spike since the aftermath of Superstorm Sandy in fall 2012. Unsurprisingly, the bulk of the increase came from Texas.
Forecasters surveyed by The Wall Street Journal expect Harvey to continue to depress employment throughout the third quarter of this year, reducing monthly job gains by an average of 27,000. By quarter’s end, the analysts expect that the storm will have shaved 0.3 percent off the growth rate of America’s GDP.
These projections are necessarily rough: As of this writing, analysts who’ve tried to put a price tag on the damages wrought by Harvey have produced estimates ranging from $81 billion to $180 billion. And, of course, none of the figures thus far account for Irma’s potential economic effects.
Meanwhile, the hurricanes are expected to put upward pressure on near-term inflation — a fact that won’t surprise anyone who’s been to a gas station in recent days. The national price of a gallon of gas hit $2.67 Friday, up from $2.35 a month ago, according to data from AAA. And as gas prices go up, consumers’ disposable income goes down — and thus, so does aggregate spending.
If Irma maintains its present trajectory, Americans may also find themselves paying more for their groceries in the coming weeks. Bank of America estimates that Irma could threaten $1.2 billion worth of crops in Florida, with most of that total generated by the destruction of fresh produce. These inflationary pressures are likely to be countered somewhat by the slowdown in growth. Regardless, they’re expected to be short-lived.
Turning away from the hurricanes’ macro-effects to their impacts on the market, insurance companies are poised to weather these storms better than one might expect. In the case of Harvey, the good news for insurers is bad news for Houston homeowners: A large share of the families and businesses victimized by Harvey were uninsured. For many residents of south Texas, it’s a catastrophic loss in their personal assets. For insurers, it means that Harvey may only take to $10 billion to $20 billion out of their bottom lines, according to estimates from UBS. Insurers should be able to cover a loss that modest out of current earnings.
Should Irma hit south Florida, the story will be different. Homeowners in that region are relatively well-insured for the kind of damage that Irma would inflict — and so are their insurers. Reinsurers, on the other hand, would take a major hit from Irma, and multiple top stocks in that sector have fallen in recent days.
Other (likely) short-term economic losers from Harvey and Irma include: restaurant chains that are heavily invested in Texas (Sonic and Jack in the Box being two); airlines that rely heavily on Houston as a hub (i.e. United); and, of course, entities that depend on tourism to southern Florida (i.e. Disney, major cruise lines).
While there will be few immediate economic “winners” from these disasters, some sectors are poised to see a boost as communities rebuild. These include the auto industry, which will be in a position to replace the 500,000 vehicles destroyed by Harvey. Construction companies, and home-improvement retailers like Home Depot, will also (likely) profit off of the rebuild.
And, as they do, the broader economy will (probably) see higher rates of job and GDP growth early next year than economists had expected before this hurricane season took a turn for the worse.
“The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms,” New York Fed president William Dudley told CNBC Friday.
Some (conservative) economists contest the idea that destructive events can ever produce economic gains. Such thinkers will often cite the “broken-window fallacy,” a parable popularized by the 19th century French economist Frédéric Bastiat.
Bastiat argues that when a hooligan breaks the window of a bakery — and the baker consequently hires a repairman to fix the window — it may look like the act of vandalism increased economic activity. But, in truth, it did nothing of the kind — for, if the baker hadn’t been forced to spend money on a new window, he would have spent it on something else.
But when you substitute properties in Houston and Miami for the bakery window — and Congress for the baker — this analogy breaks down. Unlike the proverbial baker, the United States is not currently allocating resources optimally. The federal government can print its own money — and borrow others’ — at near-zero interest rates. And the American economy has a good deal of idle labor and capital, and persistently low inflation. Which is to say: Our government has plenty of capacity to generate more employment and growth than it is currently. The obstacles to increasing public spending are political, not material: There’s little will in Congress to finance the construction of new infrastructure, despite the potential of such investments to create jobs and increase our economy’s productive capacity. But there remains bipartisan consensus that the government should rebuild cities that get throttled by natural disasters. Thus, by generating political will for some Keynesian stimulus, the hurricanes may, in the long run, produce more economic activity than they disrupt.
Or at least, that’s what history suggests. As our economy continues to do unprecedented things to the climate, it’s possible that the climate could, eventually, return the favor.