The estimated damage from Hurricanes Harvey and Irma that battered large areas of Texas, Florida, and other southeastern coastal states this past month have been estimated to cost somewhere between $112 to $155 billion. J.P. Morgan strategists estimate insured losses from Hurricanes Harvey and Irma in the range of $15 to $20 bn and $20-$60 bn, respectively. As recovering areas continue to assess the economic costs including business disruption, fuel prices, the unemployment rate, and infrastructure and property damage, the full magnitude of the hurricanes remains uncertain. However, J.P. Morgan’s first assessment of the aftermath shows that the economic and market impact is relatively muted.
As a general rule, hurricanes tend to depress economic activity in the short run and boost it in the medium run. In the near term, business output is disrupted, and the recent increase in retail energy prices may hold down consumer purchasing power for a time and restrain retail expenditures. But as the initial impact fades, repairing and rebuilding efforts should lift growth in the coming months. At the state level, this down-and-up imprint from recent hurricanes prove this historical trend but at the national level, it is harder to discern the same level of impact from recent large hurricanes for aggregate economic data.
“Normally one might think that hurricanes are going to initially depress growth, and then over time boost growth, due to rebuilding takes hold and so forth, and that seems like a reasonable conjecture,” said Michael Feroli, Chief U.S. Economist at J.P. Morgan. “However, the experience that we see after Katrina, Sandy, and Andrew, it’s really hard to find effects on the aggregate economy and economic data from hurricanes. So we actually haven’t revised our forecast in light of the hurricanes.”
Since hurricanes tend to be a short-run depressant and a medium-run boost to economic activity, in periods with major hurricanes, revisions to the GDP data are not unusually large nor are they biased in a specific direction. As such, J.P. Morgan’s forecast for the U.S. economy has not been revised, though there will be modest downside risks for overall GDP growth in the third quarter of this year and upside risks to the fourth quarter and into 2018.
Equity Strategy View
At the market level, the impact of major U.S. hurricane landfalls have historically been fairly muted with an average decline of ~2% for the S&P 500 given the subsequent pick-up in disaster-induced public and private spending. Since 1965, there have been 31 hurricane landfalls, excluding Harvey, totaling ~$520 billion of cost in 2017 dollars. Of these, only five exceeded damages greater than $25 billion: In 2005, Katrina incurred $133 billion in damages, in 2012, Sandy cost $75 billion, in 1992, Andrew cost $46 billion, in 2008, Ike cost $33 billion, and in 2005, Wilma cost $25 billion.
Similarly, within U.S. fixed income, no sector was impacted positively or negatively enough for J.P. Morgan to change its view on the high grade credit outlook. Sectors such as Insurance, Autos, Energy and Airlines were impacted by the disruptions, and J.P. Morgan believes it will be a positive driver for replacement sales in the case of the Auto sector. Specifically in Texas, disruptions in production and refining were short-lived and are unlikely to have impacts in the Energy sector beyond this current quarter’s results. The Utilities sector will see higher costs in the near term as they spend to restore power in impacted areas.
For municipals, localities will face elevated upfront hurricane-related costs of cleanup, government services, and rebuilding in the short term. In the long term, communities typically emerge stronger, due to the rebuilding and recovery efforts that provide a stimulative impact on the local economy, on top of the federal, state, and agency aid and reimbursement that flow into the region.
Feroli noted one of the few changes in the FOMC statement. “They acknowledged the impact of the hurricanes, but also said – consistent with our view – that given the historical experience, it doesn’t really change the whole macro picture for the expansion so we’ve left our forecast unchanged.”
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