Looking IRMA in the Eye – III

Author: Robert Eisenbeis, Ph.D., Post Date: September 11, 2017
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Irma is over in Sarasota and all Cumberland staff are accounted for and unharmed.  Many left town, but a couple are in temporary shelters.  Power went out at our house about 8:00 PM yesterday, but in a split second the generator kicked in and purred like a kitten all night.  We were the only light on our block.

Yesterday David Kotok put out a call for input about the possible economic impacts of IRMA. The response has been quick and thoughtful. Our attempt here is to begin to catalog the issues that our friends have identified. It is no surprise that people have properly divided their comments into both short-term and longer-term impacts.

First, here are a couple of facts concerning the Florida and Texas economies. These two states rank second and fourth, respectively, in terms of their shares of total US GDP. The Texas economy has become substantially more diversified in recent years, depending less on the energy sector. Having said that, a critical difference between Harvey and Irma is the impacts on gasoline prices due to the shutdown of refineries. Gasoline prices in Florida will increase due to Harvey, but there will not be an additional effect resulting from refinery shutdowns, as there is in Texas. Depending upon the damage to the refineries, the price impact due to restricted supply should moderate.  This contrasts with Katrina where off shore platforms were hit and seabed pipelines were disconnected and scrambles, causing substantial delays in getting production back on line.

Past experience suggests that because of the destruction of homes and other real estate and also the destruction of the automobile stock, there will be short-term increases in incomes in both states due to spending on cleanup, rebuilding, and replenishment of the auto stock. Florida and Texas rank second and third in terms of auto demand, so there will be a boost to auto sales and, incrementally, to US GDP. The two storms will probably wreck a million cars, and these will have to be replaced relatively quickly. As in the past, there will be a price effect plus a series of problems as unscrupulous agents attempt to unload water-damaged cars in other parts of the country.

Another short-run implication for Florida is that because of the increase in demand for construction and cleanup workers we can expect wages to increase, given the shortage of such workers in Florida. The wage impact will be wider than just construction as laborers quit existing non-construction jobs, creating worker shortages and wage pressures as employers respond to the loss of their workers. If the experience with Katrina is a guide, there will also be associated price increases in building and related materials.

In responding to David Kotok’s initial reports, Rajeev Dhawan of the Georgia State Economic Forecasting Center sent comparisons of the economic impact of Katrina (2005) and Hurricane Ike (2008). He argues that in estimating the impact of these storms it is more useful to investigate the impacts on gross state product than on gross national product. His data shows three interesting points that highlight the difficulty in projecting what either the short-term impacts or longer-term impacts of a major hurricane are likely to be. For example, there was an almost immediate decline in Louisiana’s GSP in the quarter that Katrina hit, and this was followed by three more quarters of negative impact. But meanwhile there was little impact on the nation’s GDP. In contrast, Ike’s impact on Texas GSP was delayed for three quarters. GSP declined about 5.6% in the third quarter after the impact and another 4.7% in the following quarter. But US GDP was in steady decline for all four quarters, starting with the quarter in which Ike hit, as a result of the financial crisis. Dhawan’s damage estimate was $81 billion for Katrina and $38 billion for Ike. Clearly, we already know that the impact estimates are likely to be far larger for both Harvey and Irma.

Our readers suggest that several important factors will come into play over the longer run. Clearly, there will be a re-evaluation by insurance companies of their policies, probably leading to higher costs. Government’s role will be important here, both in terms of the extent to which there will be government-sponsored programs and decisions made regarding cost sharing. The extent to which government chooses to subsidize rebuilding and in what form will determine the shape of rebuilding for years to come. Hopefully, codes will be strengthened, and a hard look will be taken at what additional policies are needed.

Robert Eisenbeis, PhD
Vice Chairman and Chief Monetary Economist
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