The Economic Impact of Natural Disasters

In this edition of The Bottom Line I will address potential implications of some recent major natural disasters. Within the last few weeks, North America has experienced a massive earthquake in Mexico, widespread fires in the western United States, and category four hurricanes in Houston, the Caribbean and Florida. The human impact of these events has been devastating and our hearts go out to all those who have been affected.

These types of events can also have major effects on the affected areas’ regional economies as well as the U.S. economy as a whole. While it will take time for the total economic impact to be assessed, Moody’s Analytics estimates that hurricane-related costs for Hurricane Harvey may exceed $100 billion. Irma’s costs are already $70 billion and expected to rise. These combined costs are similar to those of Hurricane Katrina, which cost the region over $170 billion.

Here are some key areas that were impacted or could affect the economy:

Energy and commodity prices – With major refineries shut down during Hurricane Harvey and many still not operational, gas prices have increased an average of $.25/gallon and some areas are experiencing shortages. Crude oil prices have risen from a low of $43/barrel in June to close to $50 as of this writing.

According to Moody’s economic data, Hurricane Irma has destroyed at least 10-15% of Florida’s citrus and sugar cane crops, a major part of the state’s economy. The impact of higher gas and oil prices can have a direct impact on GDP, while higher prices for energy and other commodities can also increase inflation, another key economic indicator.

Employment and Productivity – Widespread damage in Houston and Florida has also affected employers and workers who have been displaced by the storms. Initial jobless claims jumped to almost 300,000 in Houston in the aftermath of Harvey’s landfall, the highest reading in over two years. Unemployment rates have not been measured yet since Hurricane Irma but tourism and agriculture, the two largest industries in the state, could be hit hard by job losses and reduced productivity.

Even if these issues are temporary, we could still see an uptick in the U.S. unemployment rate for the months of August and September. Fortunately U.S. unemployment has been low overall this year, down as low as 4.3% in July. Meanwhile, continued demand for jobs in the energy and tourism industries should bring workers back to Houston and Florida.

Real Estate and Infrastructure – Hurricanes Harvey and Irma took a major toll due to heavy rains, wind, and flooding. Over 200,000 homes were damaged in the Houston area as a result of Hurricane Harvey, while countless roads, factories and office buildings were also damaged or destroyed. Wind and water-related damage from Irma impacted thousands of homes and businesses throughout the state of Florida, while many agricultural workers were displaced when temporary housing was destroyed by the storm.

On a brighter note, both Texas and Florida have dealt with many storms in the past and are experienced in insurance planning and disaster recovery. The combination of business interruption insurance, flood insurance, and state and local aid should help in recovery efforts, potentially offsetting the majority of storm related costs in both areas.

In closing, storms and other natural disasters cannot be predicted or prevented. Though the implications are great, we hope that many of the negative effects will be short-term and positive results, such as rebuilding and infrastructure improvements, will take place in the long term. In the meantime, we will continue to monitor the economic implications and hope for continued strength and resilience for the victims of the natural disasters we have recently experienced as a nation.

Written by Colleen Harvey, CFA

Sources: Moody’s Analytics, 9/14/17. All estimates are preliminary and subject to revision. U.S. News & World Report, 9/9/17.
2017-11-28T16:12:09+00:00