The full economic impact of Irma and Harvey can't be known, but it won't be good

Myles Udland
Markets Reporter

Donald Rumsfeld once said there are “known unknowns.”

“That is to say, there are things that we now know we don’t know,” Rumsfeld said before a meeting of NATO in 2002.

And in the U.S., we now know there will be a second major hurricane making landfall over the weekend. What the total economic impact of these storms will be is unknown.

Hurricane Irma is bearing down on Florida as a category 4 storm and follows Hurricane Harvey, which impacted the Texas coast and dumped up to 50 inches of rain on parts of the Houston metro area late last month.

Estimated damages from Harvey peg the storm’s impacts at somewhere north of $50 billion; Irma’s impacts are likely to exceed this total.

So what we know is that these storms will cost the U.S. economy some amount of productivity, some amount of output, and some amount of money. The storm will also require investment in rebuilding affected areas, leading to some amount of economic growth.

Economic growth does not always correspond with economic well-being

As JP Morgan economist Michael Feroli wrote late last month following Harvey, “As a general rule, hurricanes tend to be a short-run depressant and a medium-run boost to economic activity.”

But Feroli added that, “Here we should pause to emphasize the usual disclaimer: economic growth does not always correspond with economic well-being.”

And it is this split between economic growth and economic well-being that provides the unknown associated with the storm’s impact on the U.S. economy, and which illustrates why a simple accounting of a natural disaster’s impact never quite captures the true economic cost.

The track of Hurricane Irma, projected as of Friday afternoon, September 8, 2017. (Source: NHC)

On Friday, Florida governor Rick Scott said all Floridians should be prepared to evacuate; there are 21 million residents of the state.

Where are Florida residents going? North, at least. Hotel rooms around Atlanta were filling up late in the week. Airlines were also scrambling to get Floridians out of the state ahead of the storm; Reuters reported that each of United (UAL), American Airlines (AAL), and Delta (DAL) were looking to wind down operations in south Florida by end of day Friday.

Evacuations are aimed at keeping citizens safe from the storm’s most direct impacts. But this departure also requires a return, and raises the question of what happens when Florida’s citizens go back home. When will highways be open? When will airports re-open? Schools? Power? Will their homes be intact? And so on.

Why growth immediately follows natural disasters

Answering each of these questions — and then fixing the damage inflicted by the storm — is where a simple economic analysis can shed some light on what happens after the storm. A household that hoped to repaint their house in the next year or two may find itself needing wholesale repairs — a new roof, new siding, new furniture, and so on.

The economist here sees demand for durable goods, homebuilding supplies, and overall consumption pulled forward. This is positive for gross domestic product, which is the sum of all consumer spending, plus investment, plus government spending, plus the difference between exports and imports. It is a somewhat crude measure to count all of the stuff we make, buy, and trade.

Motorists evacuate for the anticipated arrival of Hurricane Irma on the northbound lanes of Florida’s Turnpike near the intersection of I-75 in Wildwood, Fla. on Friday, Sept. 8, 2017. (Stephen M. Dowell/Orlando Sentinel via AP)

But it is on this basis that the recovery from a natural disaster becomes, as Feroli wrote, a “medium-run boost to economic activity.”

Of course, the storm’s recovery costs and disruptions also weigh on the economy.

Deutsche Bank economist Brett Ryan noted Friday that labor market data for September will be “severely” impacted by Harvey and potentially Irma as well. Industrial production data — which tracks, among other things, output at U.S. energy plants — will also likely be impacted by the hurricane-related disruptions.

But this high-level economic accounting for storm-related impacts also misses the household-level stresses these costs can cause. Because the household that was to paint the house but required to totally rebuild after a hurricane, a rebuild that was only 80% covered by insurance, may have been required to wipe out significant savings to make themselves whole.

And while economists often bristle at the notion that pulled-forward demand is not “real” growth, increased outlays as a result of a natural disaster that are above the scope of a household or businesses prior budget is not the kind of durable growth that underwrites a strong economy.

More growth, as Feroli noted, does not mean more well-being.

So what we know is that there will be a major hurricane hitting Florida in the coming days. The economic and emotional tolls will be considerable. Attempts will be made to calculate much it costs and how long fixes will take.

These efforts, however, will necessarily fall short of capturing the full impacts these disruptions will have on our economy — now and in the future.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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