Weekly Market Focus

Assessing Disaster Damage

Richard Jerram,
Chief Economist,
Bank of Singapore,
Member of OCBC Wealth Panel

  • Natural disasters have limited impact on large, rich countries like the United States
  • Activity should bounce back quickly after a hit to growth in 3Q 2017
  • Murky data could affect Fed rate decision

Two major hurricanes hitting North America in quick succession provide terrible images of human suffering and physical damage. This naturally leads to the question of how much it might hurt the economy.

There is a field of economic research devoted to the impact from natural disasters. Unsurprisingly, they can be very bad news for small, poor countries with limited sources of income (think Caribbean islands).

However, they cause little lasting damage to large, rich, diversified economies (think United States). In part this is because America has the resources to rebuild, through savings, insurance or government aid, and the ability to temporarily shift activity to other locations if necessary. Human capital is largely unaffected. In contrast, an island that is dependent on tourism and agriculture is going to be in big trouble, without foreign aid.

Two major hurricanes in the same quarter (and maybe more to come) will certainly drag down US economic activity in 3Q 2017 and probably push up consumer prices as well. However, the impact should be short-lived.

First signs of economic damage came in the most recent U.S. initial jobless claims figures, which spiked to the highest level since 2015 (due to a rise in claims from Texas). This will weigh on the September non-farm payroll figures released in early October. The other surge in the chart is when Tropical Storm Sandy hit the New York area in late October 2012, and jobless claims soon returned to their improving trend.

Source: Bank of Singapore/Bloomberg

There is even some evidence that natural disasters in rich countries are positive for growth in the medium term. However, this is because we measure gross domestic product (GDP), not net. This means that we include activity related to replacing assets, such as housing or cars, that have been destroyed, but we do not subtract the damage to the original assets.

No impact on Fed policy
Hurricane damage is unlikely to have much impact on Federal Reserve policy. The balance sheet run-off is due to be announced at the next meeting on 19-20 September, while the Fed still has a few months to decide whether slippage in inflation is enough to skip a planned rate hike in December. This might be a difficult call, as it will need to judge how much the economic data has been distorted by the impact from hurricanes. However, aside from short-term timing issues, if the path of the economy is not seriously affected, then neither will be Fed policy.

On the fiscal side the government will provide some funds for disaster relief, but these will be tiny as a share of the US$19tr economy – less than 0.1 per cent of GDP. A more positive consequence is that it provided some urgency to avoid the risk of a government shutdown or debt default, which has been pushed out to December or beyond after a deal between President Donald Trump and the Democrats. However, bypassing senior Republicans in that deal might make it harder to pass tax reform.