For all the talk of multiple storms brewing in politics and financial markets it’s distressing to see and anticipate the devastation of actual storms barraging the Atlantic coast of the Americas. With Texas still in the aftermath of Hurricane Harvey, the first major hurricane to make landfall in the US since Hurricane Wilma in 2005, Hurricane Irma now thrashes through the Caribbean towards Florida with expected Hurricane Jose following shortly behind. Notwithstanding the human tragedy from such events, it’s also very hard to conceive of the economic destruction of such cataclysms.
At 400 miles wide Irma is the size of France, and with wind speeds of 185mph it is the most powerful hurricane recorded in the Atlantic Basin. Some of the mostly sea-level Caribbean islands are already engulfed and rising water-levels alone are likely to make much of the region uninhabitable for weeks. Alongside the concern for public safety the economic devastation of a Category 5 hurricane ploughing through affluent areas like Miami and the exclusive Jupiter Island are unprecedented (where many of the wealthy have hurricane insurance on their mansions).
For comparison, Harvey is estimated to have caused around $150-180bn worth of damage, of which no more than 30% looks likely to be covered by insurers. Major insurers and reinsurers like Berkshire Hathaway (and its subsidiary GEICO) may be faced with simultaneous bills for 2 for the 10 most costly hurricanes to hit the US. Yesterday the Berkshire conglomerate stock dropped over 2% as details of Irma unfolded. With the US GDP around $18tn, and if Irma is as destructive as Harvey, each effectively wipes out 1% of the entire country’s annual output. Or considering as GDP growth is estimated around 2.1% these disasters could be enough to effectively cancel out all the gained productivity this year.
The downside to GDP in the inflicted quarter are obvious and many often expect heightened demand and productivity in subsequent periods, but this effect is not a growth panacea. For in addition to this there is the prolonged supply side shock as producers work with disrupted channels: the added inefficiencies causing a net loss in output and higher prices. Overall capital spending typically increases to rebuild lost property but it does not grow the overall capital stock and diverts spending from other sectors. Economists often refer to this as “The Broken Window” scenario, referring to Frédéric Bastiat illustration of this negative effect back in 1850.
Treasuries rallied following the storm warnings, with US 10-year yields falling below 2.1% and 30-year yields tumbling below 2.7%; investment grade credit is generally performing in-line with Treasuries. Elsewhere markets remain relatively quiet today with minor economic releases mostly in line with forecasts and the Beige Book released later today expected to be a non-event.