It has been a rough few weeks. First, Hurricane Harvey drenched Houston and south Texas with feet of rain, turning millions into temporary refugees and tens of thousands of them into longer-term refugees as 40,000 homes were destroyed along with a million automobiles. Then, Hurricane Irma battered Miami and Tampa Bay, which is a rare feat and seems likely to make it the fourth most-damaging hurricane in nominal dollar terms in US history (behind Katrina, Sandy, and Harvey).
And of course, there’s the memorial of September 11th. I once thought that this day would someday become less raw, but remarkably the passage of time has not applied the usual salve in this case. I don’t know why. But the terrorist attacks of that day no longer affect the markets, so we nod and somberly reflect, and move on.
But those other two events will have an impact on markets and on data. Interestingly, the initial response to Irma was a strong rally in equity markets, as the damage was not as great as originally feared – perhaps $50bln, rather than $250bln, in damages. Aside from the human toll, whose value is beyond accounting, this is potentially a large figure for insurance companies and owners of catastrophe bonds (or what is left of them) but a mere scratch on the GDP of the nation as a whole. The total cost of the two hurricanes will be something in the neighborhood of 1% of GDP – although very unevenly distributed.
It is de rigeur in times like these to point out that GDP will increase over time with the expenditure of rebuilding, but of course, the nation is not better off and so this is not good for the economy. More thoughtful models note that the national accounts gain that 1% back over the next few years, but local production from the affected areas is at least temporarily reduced so that the net effect is actually somewhat negative over the next several years. The net effect overall is small…but very unevenly distributed.
