Harvey won’t change much of US economy

Property damage in the aftermath of the hurricane is estimated at US$23bil but economists believe that the long-term national impact is modest.

THE economic fallout from Hurricane Harvey will make the Federal Reserve’s job more difficult when it meets in three weeks, but US central bankers have looked past major storms before with little change in monetary policy and are likely to do the same this time.

In the weeks after Hurricane Katrina battered New Orleans in August 2005, the Fed confronted what staffers deemed “a thick data fog” that included short-term hits to employment and output, and concern that growth would suffer while inflation jumped because of damage to Louisiana’s energy sector.

The Fed nevertheless continued raising rates and never looked back, according to transcripts of the post-Katrina meetings. Those included a warning from then-San Francisco Fed president and now Fed chair Janet Yellen that changing policy because of the storm “could counterproductively mis- lead market participants” about the Fed’s direction.

Natural disasters can have serious local impacts, devastating families and communities, changing investment and migration patterns over time, and causing some businesses to fail in the moment while others thrive during the rebuild.

But economists generally agree that the long-term national impact of such events is modest, with short-term costs and disruptions offset by the boost in spending that comes during reconstruction and the surge of investment to replace damaged building and equipment.

“This unfortunate event will not likely affect the overall trajectory of the economy or monetary policy,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti said in a report. “In turn, Fed officials will likely look through some of the potential near-term volatility in the growth data.”

In the short-term, the United States can expect an uptick in jobless claims and perhaps slower-than-expected employment growth; muted retail sales outside of gasoline as fuel prices rise; and a drop in industrial production with between 17% and 27% of US fuel refining capacity offline as of Tuesday, and major ports closed.

Like the seasonal patterns that commonly affect economic data, a drop in one period gets made up later as federal aid and insurance checks start to flow, and businesses and households rebuild or relocate.

“As a general rule, hurricanes tend to be a short-run depressant and a medium-run boost to economic activity,” JP Morgan economists Michael Feroli and Daniel Silver wrote in an analysis of the storm’s likely impact.

With a long-signalled shift of policy on the Fed’s balance sheet expected this month, and markets waiting for a sign on the next interest rate hike, those concerns are unlikely to sway Yellen and other central bankers who have carefully established their intentions with markets, analysts said.

A Reuters analysis of satellite imagery and property data shows at least US$23bil (RM98bil) worth of property has been affected by flooding from the hurricane in parts of Texas’ Harris and Galveston counties. The number represents market value, not storm damage, and is but a small fraction of the storm’s reach, as satellite images of the flooding are incomplete.

It is impossible to discern damage amounts from the data, as satellite imagery does not reveal the depth of the floodwaters; nor does it reveal the impact of wind.

But even this partial tally signals that the storm will rank among the most damaging in US history.

Rob Moore, a senior policy ana- lyst for water issues at the Natural Resources Defence Council, said it’s “anybody’s guess” how much damage Harvey has wreaked.

“Because of the extent of flooding, a lot of insurance companies are expecting to see very high numbers of complete losses of residential properties,” said Moore.

“And large proportions of those properties are going to be uninsured. A lot of people have dropped flood insurance policies the last few years.”

There has not been major flooding in Houston in 16 years, so many homeowners have dropped coverage to save money.

Asked what would happen to them, Moore said: “They’re left in a situation nobody wants to be in. They’re not going to have very many options. And a lot of forms of federal disaster assistance aren’t available if you don’t have flood insurance.”