As Irma Hits, A ‘Disastrous’ Econ Retrospective

You can bet every U.S. econ team on the Street will be hard at work starting first thing Monday on trying to quantify the expected impact of Hurricane Irma.

To be sure, they’d be doing that anyway, but the effort takes on a special significance in an environment where a purportedly “data-dependent” Fed is debating whether it’s safe to squeeze in another hike in 2017 and whether the market is ready to absorb an announcement on the balance sheet.

To the extent the Fed decides that due to hurricane-related distortions, the data is likely to be too noisy to be useful as an input in the reaction function, the obsession over the near-term implications of Irma and Harvey makes little sense. But then again, there’s a strong argument to be made that the entire economics profession makes little sense. So you know…

On the other hand, it’s useful to have some estimates in terms of how the storms are distorting the data so we can have at least some idea of what things would have looked like were it not for the hurricanes.

In any event, multiple desks have already tried their hands at this. Here are a couple of examples:

Well, not to be outdone, Goldman is out over the weekend with their take on Harvey and there are some notable tidbits and fun visuals, which I’ll excerpt here.

First, have a look at the evolution of Harvey damage estimates:

HarveyEstimates

“As shown in Exhibit 2, Harvey’s approximately $85bn in damages would represent 0.44% of GDP, which would make it the 2nd largest natural disaster since World War II in terms of domestic property damage,” Goldman notes.

Damages

Next, Goldman constructs “two complementary measures of severity, specifically, the duration and the societal breadth of a given storm’s disruptions.” Here’s the breadth measure which shows “the share of the US population in counties with disaster declarations (directly related to the given storm event).”

HurricaneChartBreadth

Harvey then, impacted some 5% of the US population based on this classification.

On the duration measure, Goldman looks at the “federal natural disaster declaration period.” As the bank notes, “given the extent of the flooding and the continued weakness in electricity consumption we believe it is reasonable to expect Harvey’s duration could be longer than average [and if] Harvey’s natural disaster declaration continues through the end of October, its duration would move to 6th out of 44 disasters (Katrina is 5th).”

GoldmanHurricaneDisruption

Finally, to the econ, the following chart shows averages across the top 10 costliest, longest, and most broad-based disasters. As Goldman writes, “on average, costly and broad-based natural disasters produce particularly large declines in economic activity, but also sharper subsequent rebounds.”

Disasters

And here’s Goldman with the breakdown by data point:

In Exhibit 6, we broaden this analysis to show the average evolution of nine major monthly US indicators (many of which are incorporated into GDP) around natural disasters. Given the similarities with Harvey in terms of property losses and the share of society affected (as well as sustained flooding damage), we also plot the Katrina observations. All charts show month-on-month percent changes (SA) except for ISM and Consumer Confidence (index levels, sa) and trade balance (mom sa, $bn). While the data is noisy (25th and 75th percentile area shaded), meaningful growth slowdowns or outright declines are common in the month of or immediately following these disasters. However, similar to the monthly GDP chart above, these indicators often rebound significantly to above-trend growth over the following 2-4 months.

GrowthData

So again, we’re back to the same old question: are hurricanes good?

And even more ridiculous, are we now left to hope that disasters are as severe as possible given the distinct possibility that the more destructive they are, the sharper the eventual rebound in the econ data?

Here’s Goldman’s conclusion:

In terms of the growth impact from Harvey, this “top-down” model would suggest a sharp drag on 3Q GDP growth of as much as 1.4 percentage points (qoq ar, relative to baseline)–reflecting Harvey’s huge property losses and the relatively broad-based societal footprint. Importantly though, the model would also suggest a rebound commencing in 4Q (+0.5pp impact) that we believe would likely continue into 1H18.

So I guess the silver lining here is that if we just keep denying climate change and the disasters continue to get worse, we can “look forward” to more frequent and increasingly “bigly” GDP-boosting cleanup efforts.

 

 

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2 thoughts on “As Irma Hits, A ‘Disastrous’ Econ Retrospective

  1. Exhibit 1 needs to be about 4-5 times taller than it is. The problem with these laughable cost estimates is they are made largely by people whose greatest disaster has been losing their favorite matching sock. There are hundreds and hundreds of miles of streets..roads..highways and freeways in Houston that are going to have robe rebuilt. That will take place over YEARS..the base rock foundations of these things are useless and the shoulders will give way and collapse. That’s just the roads..providing there are many cars left to drive them.

    What of all the underground vital utilities under pressure..sewer lines..gas lines..you get the picture. Then there’s the housing..the businesses. The LONG term loss of income and wages. How many entire schools will have to be rebuilt because of fungus and mold damage?

    Have we even mentioned the bureaucratic infrastructure it will take to organize and carry thru everything that needs to be done? No way.

    Come back in 2-3 years and look at those charts and compare it to my thumbnail guesstimate of $700 billion and see who’s closer…..

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