Major hurricanes and other catastrophic weather events wreak havoc on the lives of many of those in their path. Lives are lost and property is damaged. It is needless to say that we would rather these events never occur. However, Americans are resilient and strong, and will overcome the diversity of epic weather events. Initial financial predictions of a major storm are in the billions of dollars, but what is the long-term effect of this devastation on the economy?
If you look at the numbers compiled by Moody’s Analytics, Hurricane Harvey had an approximate $125 billion hit on Houston, the nation’s fourth largest city. However, the loss of economic output was $8.5 billion, which is hardly a blip on the trillion dollar radar of U.S. output as a whole. The macroeconomic numbers also play this out. GDP rose at a healthy rate of 2.8% the quarter that the storm struck. The following depicts the largest natural disaster losses since 1950.
A couple of takeaways from these numbers. Short-term setbacks to businesses that were affected are very real, but will quickly lead to growth and rebuilding, thus increasing economic output such that it somewhat mitigates the overall damage figures. Albeit, money is being spent by business and consumers alike, but it is not necessarily being allocated to where they would want it. Instead of money going into growth or improvement, it is going into fixing and rebuilding what was lost to the storm. Hurricane Katrina in 2005 is an example of this. The broader economy grew at a robust 3.6 percent annual rate, one of the best quarters in the last expansion. Property damage from Katrina, at $161 billion, far outnumbered lost economic output, at $31 billion, according to Moody’s.
It is hopeful that the economic consequences of recent Hurricane Florence in the Carolina’s will be absorbed by the greater overall economy. As with previous storms, short-term issues will certainly take place, but usually after 18 to 24 months, most operations are running at pre-storm capacity. Location of the natural disaster can have differing effects on the economy. Storms that damage oil producing areas in the gulf are more likely to have tangible effects. Most of us notice that gas prices usually increase somewhat as the supply of oil may decrease. Every penny increase in gasoline reduces consumer spending nationally by $1 billion over the course of a year, estimates Ryan Sweet, an economist at Moody’s Analytics. East Coast storms don’t bear the same risk.
Storms like Florence can wreak havoc on statistics as well. Economists trying to forecast economic growth, in the auto industry, for instance, have to factor in what percentage of vehicles purchased were a result of those lost in the storm, compared to outright new purchases. Difficult to say the least. The main takeaway here is that natural disasters are just that; disasters, both mentally, physically, and economically. We would of course rather never see them. The brighter side is that once the pieces that can be put back together are, the overall economic output will grow or decline at its non-storm related pace.