One of my favorite economists published a report this week titled “Hurricane Economics.” It is obviously timely. It is insightful. And it contains valuable advice for windblown investors.
First Trust chief economist Brian Wesbury drives home the point that natural events like hurricanes have not slowed down the U.S. economy to the point of recession. Likewise, in the aftermath of catastrophic events such as floods, fires and hurricanes, the rebuilding efforts create demand in some sectors (home goods, construction, raw materials, etc.), but otherwise have a minimal impact on the overall economy.
“This is where investors often make two different mistakes about how these massive weather events will affect the economy and the markets,” Wesbury writes in the report. “Some might think that, as did (doomsday economist) Nouriel Roubini after Katrina, the damage itself will cause a recession. Others take the opposite tack and think rebuilding efforts might actually help the economy,” Wesbury continues. “Neither are correct.”
Wesbury contends the U.S. economy will continue steadily along at what he calls a “plow horse” pace, regardless of these natural disasters. While the human suffering and devastation and losses cannot be minimized, the free markets always help our country and its people respond and recover.
“These markets allow accumulated wealth and know-how to focus on recovery,” he says. “The sheer size and flexibility of the U.S.’s capitalist system allow resources to be shifted and directed toward recovery.”
Harvey & Irma
The hurricanes seem to be stacking up lately. While the Houston area recovers from torrential rainfall and flooding of Hurricane Harvey, another storm of even greater strength has pounded Florida and Georgia. Hurricane Irma was tracking as a Category 5 storm, but made landfall in Southwest Florida at a Category 4 level.
It’s been only five years since Hurricane Sandy, nine years since Ike and 12 years since Katrina. And let’s not forget Ivan. Some estimates of Harvey’s damage approach the $100 billion price tag from the cleanup and repairs of Katrina. Sandy resulted in $75 billion in costs.
However, none of these storms caused a recession. Although there was little acceleration in economic growth. “Replacing physical capital does not generate new wealth, it only replaces old wealth,” Wesbury maintains.
In Harvey’s example, many automobiles were ruined, left idle amid the flood waters in Houston. It is estimated that these 500,000 cars and trucks will need to be replaced. So while automakers will feel a bump in purchases in the next few months, the storm has hurt sales for much of the month of August. (Many of the car lots in the area were also submerged in water.)
Harvey struck an area that represents about 5 percent of U.S. auto demand — and it did so for at least a week in August. This suggests Harvey cut roughly 1 percent off of August sales nationwide.
The replacement sales will help make the national automobile numbers look better later this year or early next year. However, without the storm, this spending and demand would have appeared elsewhere, in other sectors. The lesson from Wesbury is that natural disasters, while a tragedy in so many ways, will not shift the current path of the U.S. economy.
And investors should respond — or not respond — accordingly.
Steve Nicklas is a financial advisor and a chartered retirement planning counselor with a major U.S. firm who lives on Amelia Island. His financial columns also appear in several newspapers in North Florida and in South Georgia. He has published a book, “All About Money,” of his favorite columns from the last 20 years. The book is available at local stores and on Amazon. He can be reached at 904-753-0236 or at email@example.com.