Flooded Street
Markets and Economy

Assessing the Economic Damage of Hurricanes

The US economy was on track for solid growth in the third quarter, but two natural disasters have quickly changed those projections. Still, the size and diversity of the nation’s economy should help it overcome the immediate disruptions brought about by Harvey and Irma.
Jim Glassman, Head Economist, Commercial Banking
September 20, 2017

Hurricanes Harvey and Irma devastated large areas of Texas and Florida and have severely disrupted both regions’ economies. Consequently, a range of economic indicators may remain weak throughout the fall as retail and industrial activity slows. And while that will impact the US economy in the short term, the storms’ fallout shouldn’t alter the country’s long-term trajectory.

Immediate Consequences

Initial unemployment applications in Texas last week exceeded the weekly rate of claims during the 2008 recession. Many Houstonians no longer have a workplace to return to, and a significant number of residents will have to leave their jobs temporarily to join the rebuilding effort. The wave of unemployment applications in Texas was sufficient to raise the nationwide rate of layoffs, which now stands well above the record-low range seen throughout the first half of 2017. This next week’s figures are likely to show additional fallout from Hurricane Irma, which is expected to push the nationwide layoff figures even higher.

Reports of weakening retail sales and falling industrial production are likely to come next, as third-quarter US GDP growth could fall as much as 1.7 percentage points. Ultimately, the hurricanes may reduce national GDP growth for the year by as much as one-half of a percentage point.

Long-Term View

Economic growth may slow in the coming months, but fallout from the storms shouldn’t be confused for structural weakness in the US economy. The economy was on track to expand at a 3 percent pace in the third quarter. While the hurricanes may disrupt activity along the coast temporarily, history tells us that natural disasters don’t sap the country’s long-term momentum.

The hurricanes will certainly impose opportunity costs—the productivity lost during rebuilding can never be regained. But in the past, even the most severe natural disasters haven’t had a lasting impact on the nation’s employment and growth trends. The US economy is large and diverse enough to absorb the disruption from regional disasters.

Policy Implications

How will markets react to the resulting weak economic reports? Investors should take reports of rising layoffs in stride, anticipating the trend will naturally reverse in the near future. Similarly, the Federal Reserve will likely be patient throughout the fall. Despite the Fed’s commitment to basing decisions on current economic data, it’s likely to look past the disruptions caused by the storms and instead remain focused on long-term goals of normalizing interest rates and containing the inflationary pressure that will accompany the return of full employment.

The US economy was posting solid gains before Hurricanes Harvey and Irma, and their damage won’t derail growth for long. The labor market has been creating jobs at an above-trend pace all year, and as affected areas recover, the workforce will resume making gains. As Texas and Florida begin to rebuild, the economy should quickly regain its footing.

View our economic commentary disclaimer.

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