How Harvey and Irma will change lives; the US economy too

Graham Smith, Market Commentator, 13 September 2017

While the extent of the devastation wrought on the southern states of the US by the hurricanes Harvey and Irma has proven shocking, neither event came out of the blue. Natural disasters in the shape of outlandish winds and rain have become all-too-familiar world events.

Secondary, of course, to the human tragedy and loss of life caused by Hurricanes Harvey and Irma is their potential economic impact. One of the lessons from Hurricane Katrina 12 years ago was that recovery and rebuilding efforts after a major storm last years, not months. What’s more, it can mean a whole new way of life for the people affected.

Short term, the challenges will be familiar ones to flood-torn communities of the UK in recent years. Practical considerations are where it’s at. The drying-out of homes – those that will be safe to inhabit at some point in the future – will be accompanied by a vast range of other activities, from demolition, through mould removal, to repairs and rebuilding.

The demand for these services is likely to exceed supply. This week, the UK plant hire firm Ashtead, with its heavy exposure to North America, provided a flavour of what’s to come. The group’s CEO said the hurricane season has already generated significant activity and that it will result in an increase in demand for the company’s fleet1.

Initially, the reinstatement of essential public services will be more important than building houses, so displaced families, those without relatives they can stay with in other areas, may be forced to relocate to hotels, mobile trailers or other temporary accommodation. That has the potential to drive a housing shortage and rise in property prices and rents.

Transport is set to be another major issue. With many cars destroyed during the storms and people possibly displaced from their homes and usual places of work, cars, hire cars and taxis will be in demand.

Disruption to industry and commerce – oil production in Texas or tourism and orange crops in Florida, for example – will be another factor. For the people currently employed in areas like these, casual workers particularly, new employment opportunities may beckon – in reconstruction efforts as opposed to the jobs they had before.   

Insurers are bound to be hard hit. Hurricane Katrina produced the largest single loss ever for the insurance industry, amounting to more than US$41 billion2.

Longer term, the world and its peoples will demand solutions to the risk of increasingly severe weather patterns. In some cases, technological advances will make this possible; in others, changes in human behaviour, plus a good deal of political will, time and money will be required.

There will need to be a new acceptance that houses cannot be built on low-lying, flood-prone areas or that they need to be unusually structurally equipped if they are.

Unfortunately, while this natural disaster will create unforeseen costs for some industries and considerable opportunities for others, a widening gap in fortunes will be experienced by the residents of these regions too.

Those with sufficient resources may have their houses rebuilt. However, after Katrina, families without such means were forced to move to other cities and states, their lives and communities changed for good.

Surveys conducted years after Katrina suggest the poor, in particular, are less likely to return. For many of those that owned homes in New Orleans, the cost of renovation represented a challenge too far. Non-homeowners also found it difficult to return, because of the lack of affordable rented housing3.

What the legacy of Harvey and Irma will be hangs in the balance, but the opportunity is clear. The Trump administration wants to rebuild America; now it – and a hitherto intransigent Congress – have another incentive to do it.

The government will not want to be viewed in the same light as the Bush administration following Katrina, the damage from which is estimated to have cost US$108 billion according to the Federal Emergency Management Agency4.

Still, it is too early to fully understand if and how the problem will be grasped. Congress has agreed to release funds of US$15 billion to assist Texas, but Katrina tells us that is likely to be a drop in the ocean as far as the eventual cost of Harvey and Irma will go5.

In the meantime, the US economy is likely to take some sort of hit, from disruption to industrial processes and commerce, transport interruptions and a lack of available workers from an already tight labour market.

However, given the vast size of the US economy and its reliance on consumer spending, it’s unclear that growth in the quarters to come will show much of it. Growth held up after Katrina, all of the way into the global financial crisis in 20086.

The US Federal Reserve – understood to be considering another rise in interest rates this year – will, no doubt, be keeping a watchful eye on proceedings.

However, perhaps the potential for a deferral of another rise in interest rates should not be overstated. The US economy is growing well and, once the initial hurricane disruption has subsided, rebuilding programmes are likely to raise economic activity, not reduce it.

Meanwhile, it remains for all of us to ensure we are prepared and ready to accept the challenge of the unexpected. That means appropriate insurance, emergency cash and contingency plans for if the worst happens.

There are parallels to some of the facets that make a good long-term investor too: Having a clear strategy and sticking with it; diversifying risk; and keeping some cash at hand to deploy in the event of a downturn. “Worrying when it happens” is always too late. 


1 Ashtead Group, 12.09.17

2 Insurance Information Institute, March 2010

3 The Location of Displaced New Orleans Residents in the Year After Hurricane Katrina, Sastry and Gregory, June 2014

4 FEMA, October 2012

5 New York Times, 07.09.17

6 Federal Reserve Bank of St Louis, 12.09.17

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