Tags: hurricane | economy | irma | harvey

Despite Final Totals, Hurricanes Will Be Big Hit to Economy

Despite Final Totals, Hurricanes Will Be Big Hit to Economy
(Alan Crosthwaite/Dreamstime)

By    |   Monday, 11 September 2017 09:32 AM

While it’s completely impossible to evaluate the damage that the hurricanes Harvey and Irma will cause to the people of Texas and Florida and beyond, we already we got information that the estimates of the economic costs of these hurricanes could end up in Texas ranging from $81 billion to $180 billion, and for Florida in the neighborhood of $300 billion dollars.

Of course, these are still rough estimates.

Besides that, for Florida we got information that insurer firms could be liable for up to more or less 50 percent of these $300 billion dollars for damages caused to homes, businesses and what’s called key crops like orange groves. The insurers liabilities for Texas could be in the same range.

To keep it simple, in the short run, these events are certainly not positives for growth as demonstrated, for example, by last week’s initial jobless claims that surged by 62,000 to 298,000 and you don’t have to be a pessimist to expect and even worse number this week.

By the way, the 62,000 was the largest single-week spike since the fall of 2012 when we had a comparable situation in the aftermath of Superstorm Sandy.

Interestingly, Goldman Sachs (GS) just released a report from its economists that reads: “We expect this weakness to reverse over the subsequent three quarters, more than recouping the lost output. We are also increasing our respective quarterly growth forecasts by 0.4pp, 0.2pp and 0.4pp for Q4, Q1, and Q2, (to +2.7 percent, +2.5 percent, and +2.4 percent). We will revisit these estimates once reliable information about the toll from Irma becomes available. We stress that the overall impact of the hurricane on second-half growth is uncertain, as the negative effects are likely to be offset by an increase in business investment and construction activity once the storms have passed.”

The GS economists also estimate that the storms will probably shave 0.3 percent off the GDP growth rate at the end of Q3.

In clear language that should mean, at least in my opinion, that the hurricanes will not change the Fed’s intention to announce at the next FOMC meeting on September 19-20 to start in October gradually removing its monetary policy accommodation.

Today in New York, the United Nations (UN) meets to discuss the watered-down U.S. sanctions proposals against North Korea. It is not clear if the dilution of the proposals will overcome the clear initial opposition to the U.S. proposals from the Chinese and the Russians.

The meeting today does not perhaps add much to market knowledge about the standoff that any failure to sanction North Korea might increase the desire of President Trump to act unilaterally in this particular area.

The threat of increased trade tensions between the U.S. and China for instance, has to be taken seriously by everybody.

Besides that, over the weekend New York Fed President William Dudley suggested that the devastation brought by the recent hurricanes might impact the timing of a Fed rate hike, but it should not affect the necessity of a rate hike given the strength of the U.S. economy overall. The remarks were made in the context of U.S. growth necessitating a rate hike rather than a detailed focus on the inflation story.

Finally, we got the Chinese producer price inflation (PPI) data, which caught some attention in the markets, as it rose somewhat more than expected at 6.3 percent year-over-year (y/y).

Now, does this mean that we are at the start of a global inflation upswing? No, it does not.

Chinese PPI has a very limited correlation with Chinese export price inflation.

Chinese export price inflation has also a very limited correlation with its own and other economies’ domestic inflation rates.

Domestic labor costs whose index decreased to 103.50 index points in Q2 and that now stands only 2 index points above its record low of 103.30 index points it reached in Q3 of 2016 and the domestic labor costs are far more important to the price of a Chinese import than are Chines inflation pressures.   

However, one could argue that rising producer price inflation in China is a signal of domestic inflation pressures as the relationship between Chinese PPI and Chines CPI is a bit better than the relationship between Chinese PPI and anyone else’s PPI.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The threat of increased trade tensions between the U.S. and China for instance, has to be taken seriously by everybody.
hurricane, economy, irma, harvey
Monday, 11 September 2017 09:32 AM
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