September 22, 2004
Will three hurricanes hitting the mainland and a fourth
still lurking in the Atlantic have a measurable impact upon the U.S.
Already, companies have been lowering their earnings
estimates for the summer quarter, citing hurricanes as part of the reason
for this result. The insured
damage appears to approach $25 billion, not that far below the insured
impact of the Twin Towers.
Equally damaging has been the lost activity as
evacuations have vacated business sites, including restaurants and consumer
services, for days. Lost
electricity generated even more economic hardship.
No one knows for sure what the total impact of this
unusual weather will be upon the economy, but it will be significant.
The insurance industry swears that a shortage of risk
capital will not develop this time, unlike the insurance fallout following
9/11. Certainly, less of the
loss is covered because of higher deductibles or even exclusions for wind
and/or water damage in some instances.
However, those reinsurance companies probably are
whistling in the dark. The
losses are now large enough to have some impact upon the capacity to
re-insure. That means insurance
premiums will be going higher next year after finally stabilizing this year.
Economic data already are being impacted.
When unemployment claims offices were evacuated, claims plunged.
They then began jumping as the offices re-opened.
Retail sales may have been knocked down by 0.7% in
August because of Charley. While
some sales were created as spoiled food was replaced, plywood was purchased,
and repairs began, as much as another full percentage point of sales could
have been lost in September. We
will then see a rebound in October, if we can get past Jeanne and back to
Normally, the replacement of damaged capital begins to
raise economic activity about two months after the event. With more than $50 billion of destroyed capital needing
repair or replacement (about twice the insured impact), the home
improvement, furniture, appliance, and home electronics distributors will be
Before that increased activity begins to create jobs,
U.S. personal income will be impaired by the loss of capital (a write down
for proprietors and rental owners) and probably will even decline in
Of course, the loss of capital also impairs profits, even if sales were not also lost. When a work site is destroyed, the lost capital is charged against revenues. Thus, profits are sharply reduced. (Those firms with significant presence in Florida have been reporting reduced profits of 3 to 5% from what they previously were informing their shareholders.)
Profits are further impacted because stores were
shuttered, customers evacuated, and debris, power outages, and damages
restricted use of productive assets. Again,
I would not expect the impact to be dramatic for the nation, though I would
expect to see U.S. profits fall several percentage points from what
otherwise would have occurred because of the hurricanes.
Of course, the impact in Florida and along the gulf
coast is much larger than reflected in the national reports. I would be surprised if personal income in Florida does not
decline for the summer quarter. Higher
write-offs and lower sales also will seriously impact the revenues collected
by the state.
Then there is all the government capital that needs to be replaced and repaired. Those street lights need to be replaced. Again, I would be surprised if Florida’s governments do not need at least $5 billion to restore all functions.
I will grant that even $50 billion in lost capital in
an economy that probably supports $30 trillion in capital is not very large.
Even the lost economic activity from unused restaurants, theatres,
etc., probably about another
$50 billion that will not be recovered, is a small part of the $10 trillion
Nevertheless, I would be foolish not to shave about 0.4
percentage points off GDP growth for this quarter (and then add about half
back in each of the next two quarters as repairs are done).
The profits impact is much larger, possibly between 3 and 5% for the
quarter. Some will be restored
in the next two quarters as well, but not all.
So be prepared to see a bit of weakness in the next monthly economic reports and in the stock values of firms that will need to shave their profits estimates for the remainder of this year.