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. economy?

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 normal. 

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 busy. 

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 September. 

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 in GDP.

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. 


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