October 17, 2017

Did Hurricanes Harvey and Irma Take the Wind out of Economic Growth?

Bruce Yandle

Distinguished Adjunct Fellow

In late August and early September, America's sleepwalking economy suffered the effects of two devastating hurricanes. At the time, the economy was generating a pedestrian 2.2 percent real GDP growth and added an average of 172,000 jobs each month in 2017.

Hurricane Harvey made landfall on Aug. 25; its fury focused on Houston, America's fifth-largest city, and the Texas coastal zone, which is a petrochemical heartland. Hundreds of thousands were evacuated. Irma, the next hurricane, hit the Florida Keys on Sept. 11, made its way along Florida's west coast and mainland and also severely damaged the Georgia coastal zone. Almost 1 million cars hit the road in an effort to escape Irma's harm.

Massive post-hurricane repair is now underway, but economic life in the damaged regions was disrupted in varying degrees for more than two weeks.

We do not know, as yet, how these two hurricanes affected the nation's GDP growth, but we do have an indication of what happened to employment. Taking a close look at labor market effects may even help reveal how much GDP was battered.

On Oct. 6, the Bureau of Labor Statistics reported that the U.S. economy — which, recall, had been adding on average 172,000 jobs each month — sustained a net loss of 33,000 jobs in September, the first such loss in seven years. This suggests some 205,000 job additions somehow disappeared.

In August, Texas and Florida altogether had 22.5 million people employed. Focusing just on those two states, the loss of 205,000 jobs equals 0.9 percent of their combined employment level. This amount of labor might have produced about 0.12 percent of national GDP.

This preliminary calculation suggests that instead of seeing a 2.2 percent real GDP increase for the affected period, we will see around 2 percent. The two hurricanes did not flatten the economy's main sail.

The effects of Hurricanes Katrina and Rita, two catastrophic storms that hit in August and September of 2005, offer a bit of guidance here. U.S. real GDP growth in the second quarter of 2005, just before the hurricanes, was 3.4 percent. The growth rate fell to 3.33 percent in the next, a loss of 0.07 percentage points.

The hurricane devastation will lead to a large Texas/Florida construction boom, with construction crews and roofers flocking to the affected regions. This will come with a lag, of course, depending on the flow of insurance payments to those who lost assets.

I watched demand deposit data in 1989 when tracking the effects of Hurricane Hugo, a serious storm that hit the Atlantic coast and imposed large losses on South Carolina. When Hugo hit, bank deposits fell significantly. People evacuating took some cash with them. Then, within 30 to 60 days, there was a bank deposit surge fed by insurance checks. This was followed by a fast-paced outflow of funds as construction repairs got underway. We should expect to see the same in Texas and Florida.

Does this mean that hurricanes, on net, may generate real GDP growth? Of course not. They may generate positive cash flow for the affected regions, but there is an asset side to the regions' balance sheet that has been seriously harmed. Insurance and other transfers will replace part of the asset loss, but not all of it.

Broken lives, homes, schools, and workplaces can be repaired, at least partly, but natural disasters are still disasters that we hope to avoid. Meanwhile, the U.S. sleepwalking economy continues apace.