Hurricanes will buffet U.S. economy for months to come

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The hurricanes that have devastated Florida and Texas have also left some serious economic damage in their wake, but economists say the impact will only be temporary – setting the stage for what could be an impressive bounce-back later in the year.

Although economists acknowledge that it's still early to assess the full economic impact of Hurricane Irma, which Tuesday headed north into the Carolinas (having weakened to the status of tropical depression) after ripping through Florida on the weekend, most estimate that Irma and the earlier Hurricane Harvey in Texas will put a dent of as much as 1 per cent in the pace of third-quarter gross domestic product growth. Some economists have already lowered their growth forecasts for the quarter to about 2 per cent annualized, a full percentage point below the second-quarter pace and nearly a percentage point below pre-storm expectations.

"August retail sales and inflation data due at the end of this week will likely show the first signs of these effects – but worse will come over the months ahead, driving headline growth downward through the third quarter," said Karl Schamotta, director of global product and market strategy at foreign-exchange firm Cambridge Mercantile Corp. in Toronto.

The storm-related growth slowdown could, in turn, lower the odds that the U.S. Federal Reserve will raise interest rates again this year – which could, in turn, deliver a hit to the U.S. dollar, Mr. Schamotta said in a note to clients.

James Knightly, chief international economist at ING Bank in London, calculated that, based on regional gross domestic product, "Around 10 per cent of the U.S. economy is likely to have experienced some form of economic disruption because of the hurricanes." The biggest of these regional economies is the Harvey-damaged Houston area, the fifth-largest metropolitan population in the United States and a major energy and shipping hub, which generates about 3 per cent of national GDP.

Harvey caused widespread temporary shutdowns of oil refineries along the Texas Gulf Coast, taking as much as one-quarter of U.S. gasoline production out of commission at the peak. Many of those facilities are only just restarting this week, after two weeks offline, and many will operate well below capacity for several more weeks yet. That not only will put a dent in the energy sector's contribution to economic output, but it has also strained U.S. fuel supplies, causing prices to surge (thus boosting inflation) and potentially restraining broader U.S. economic activity.

But beyond the energy sector, the hurricanes' impacts are expected to weigh on a wide range of economic indicators over the next couple of months. The storms and their aftermath will temporarily reduce employment, disrupt consumer spending, delay manufacturing and slow foreign trade.

"The short-term effect of natural disasters is usually to diminish GDP, since economic output and demand are both impeded," said Eric Lascelles, chief economist at RBC Global Asset Management. "At present, we are budgeting for something in the range of a 1-percentage-point or slightly worse hit to third-quarter annualized GDP in the U.S. Similarly, the disruption of oil refining in the Gulf region may send the U.S. consumer price index as much as 0.75 per cent higher than normal in September."

Economists at U.S. investment bank Goldman Sachs said the September employment report could be particularly hard-hit by the Irma effects, as a result of a quirk in timing. This week is the so-called "reference week" for the monthly U.S. employment report; the report is actually a snapshot of employment as of the week that includes the 12th of each month. They said September employment could be reduced by 20,000 to as much as 100,000, depending on how much of Irma's impact on workers lingers through this week.

Despite all this negative news, many economists expect that U.S. growth could recover most of its third-quarter losses in the fourth quarter – where growth could exceed 3 per cent annualized. It's quite typical for economies to bounce back impressively from hurricane-induced disruptions – not only as activity returns to normal, but as rebuilding begins in the areas damaged by the storms. All that destruction will require construction and manufacturing production and spending to replace what was lost, which shows up as increased economic activity.

A particularly strong example of this looks set to play out in auto sales. Auto-industry services firm Cox Automotive estimated that Hurricane Harvey delayed up to 40,000 new-car purchases in the affected region, enough to reduce national sales in August by as much as 3 per cent. But Cox also estimated that Harvey's floods destroyed 300,000 to 500,000 vehicles, implying that a surge in demand for both new and used cars is on its way in Texas.

"From the Kobe earthquake through to Hurricane Andrew, history shows we often see a three-stage cycle – an initial period of destruction, a secondary impact when indirect costs are felt in employment and output, and a tertiary phase in which spending rises sharply and economic growth accelerates," Mr. Schamotta said.