How Harvey And Irma Will Slam The US Economy: A Complete Walk Thru From BofA

Tyler Durden's picture

Last week, before the full devastation from Hurricane Harvey was unveiled, Goldman and JPM were the first banks to suggest that the storm's impact on US GDP would be modest: a slight decline in Q3 growth,  offset by a similary modest rebound in Q4 and further as emergency funds "trickled down" through the economy. Now, with more clarity on just how destructive the storm has been, other banks are coming out and they are not nearly as confident that the damage from Harvey will be "modest" - in fact, according to a just released analysis from Bank of America, Harvey will result in at least a 0.4% hit to Q3 GDP, which has reduced BofA's Q3 GDP estimate to 2.5%.... and that excludes Irma.

Here's Michelle Meyer explaining why in just a few weeks, all the economic misses will be blamed on, you guessed it, hurricanes.

First came Harvey, next comes Irma

 

Hurricane Harvey crashed down on the shores of Texas, leaving behind record flooding and destruction. According to early estimates, Harvey may end up being the most expensive natural disaster in the US since 1980, costing $70-108bn (Table of the day). Thousands of people have been impacted. We are now actively monitoring Hurricane Irma, which threatens to hit the coast of Florida over the weekend.

 

BofA attempts to provide a rough guide of how to quantify the impact on the economy, by exploring the following channels:

  • High frequency data: Harvey has already shown up in initial jobless claims contributing to a 62,000 jump in claims for the week ending 2 September. We also expect some impact in consumer confidence, consumption, construction, industrial production, and inventories.
  • GDP: Natural disasters tend to reallocate growth - serving as a drag in the quarter when the disaster hits and a boost in later periods from rebuilding efforts. We estimate that Harvey will end up slicing 0.4ppt from 3Q GDP tracking, bringing our forecast to 2.5%. Hurricane Irma threatens to drag growth down further. Rebuilding is historically a long process, implying upside risks to growth early next year.
  • Inflation: Energy prices have spiked, but pressures will likely ease. There are upside risks to auto prices given replacement demand.
  • Washington DC: The urgency to pass a bill to provide funds for hurricane relief facilitated a bipartisan compromise for a three-month continuing resolution and suspension in the debt limit.

Harvey - and then Irma - will complicate the interpretation of upcoming data releases. In the short term, the hurricanes serve as a drag, but ultimately history suggests the rebuilding efforts underpin growth. Unless this time is different of course. In any event, the Fed will be flying blind (in a hurricane so to speak) in a few days when it has to decide whether to hike rates further following the latest economic data.

The early signs to watch for Harvey (and Irma's) impact:

The first evidence of Hurricane Harvey's impact on the economy was the larger-than-anticipated drop in August unit auto sales to 16mn SAAR, released last Friday. Initial jobless claims for the week ending 2 September spiked to 298,000-the highest level since April 2015-driven by filings in Texas. We took a look at various high frequency indicators during the past hurricanes, listed in Table of the day to get a sense for how the data might evolve.(*) In particular, we compared the monthly trajectory following the disaster to the six-month average level or growth rate leading up to the event. In other words, how much did the indicator deviate from the prior underlying trend? Since Harvey is shaping up to be one of the costliest hurricanes in history, we calculated a weighted average trajectory across past disasters based on the real cost of damage.

 

The post-Harvey moves in initial jobless claims and auto sales are thus far consistent with our findings. History also suggests auto sales remain depressed for a few months following the hurricane, which means we should not expect a quick rebound (Chart 1).

 

BofA's analysis indicates the next signs of Harvey will likely show up in the soft data, namely consumer sentiment and confidence, which also proves to be somewhat persistent. Weakness will also emerge in real consumption, industrial production, business inventories, and construction spending. These will have implications on GDP tracking, as discussed below.

Then there is Inflation, where as anyone following the price of gas at the pump, it's "all about energy"

Energy and autos are two categories in the inflation data most sensitive to natural disasters. Prices at the pump have already jumped higher, increasing 30 cents or almost 13% in the immediate aftermath of the Hurricane. This likely reflects challenges distributing and producing gasoline, as more than 20% of US oil-refining capacity was knocked out as a result of Harvey. However, prices should normalize as refineries get back online over coming weeks, meaning only a transitory bump to headline inflation. Indeed, we have already seen wholesale gasoline futures return to pre-Harvey levels, which will ease pressures at the retail level (Chart 2).

 

We see some upside risk to auto prices. The prices of autos have been on a persistent downward trajectory given weakening demand and excess inventory. Many autos in Houston will need to be replaced, boosting demand and potentially tempering some of the downward pressure on prices. That said, our auto analysts are skeptical that the replacement demand will be enough to offset the headwinds from the turn in the cycle.

 

Hurricane Irma also threatens to impact near-term inflation as it could impact $1.2bn of crops in Florida, most of which are fresh produce. Irma could greatly reduce supply of these crops which would lead to higher prices for a period of time. The bottom line is that there is upside risk to headline inflation as a result of the hurricanes and possibly slight upside to core inflation.

Which brings us to the economic punchline: why BofA believes that GDP: weaker now, stronger later

We estimate Hurricane Harvey will slice 0.4ppt from GDP growth in 3Q, which takes our tracking estimate down to 2.5%. Hurricane Irma, if it hits Florida as feared, would also be a drag. Moreover, although rebuilding efforts will start in Texas, we have found there to be considerable delays in prior hurricanes, suggesting 4Q may not benefit much from rebuilding. Looking ahead, reconstruction will create upside risk to growth in early 2018. The literature is mixed on the net impact on economic growth from natural disasters; it partly depends on the type of reconstruction and whether the changes improve upon the existing structure or facilities (boosts productivity) or simply restores them to their previous state.

 

We estimate the near-term effect to GDP growth using two approaches: (1) adjusting the assumptions for the high frequency data in our "nowcasting" GDP model and (2) back-of-the-envelope estimates based on the share of output from the hurricane-stricken areas. For the first, we create a counterfactual assuming no hurricane, which is based on prior monthly inputs to our GDP tracking estimates. We then plug in new forecasts for the remaining August and September data, relying on findings from our earlier analysis of the high frequency data. Using this approach, Harvey slices 0.4ppt from growth, owing to weaker consumer spending (mostly autos) and construction spending as well as a bigger inventory drawdown (Table 1). This is consistent with the range of estimates from our back-of-the-envelope estimate. Houston is the fourth most populous city in the US and the Houston metro area accounts for 3.2% of GDP (as of 2015). As such, a 5-15% decline in output over 3Q due to the hurricane would slice 0.2-0.5ppt from GDP growth.

 

Finally, and most unexpectedly, is how Harvey's impact streetched as far as Washington, DC, where as BofA states simply, "it helped"

Policymakers came back after the summer vacation with a number of mandates: extend the debt ceiling, fund the government past 30 September and provide funds for Hurricane Harvey relief. The desire to pass relief for Harvey has helped to generate a bipartisan plan to temporarily extend the debt limit and fund the government. On 7 September, the Senate passed a bill by a vote of 80-17 which provides $15.25bn in Hurricane relief (with provisions to address potential damage from Hurricane Irma), a continuing resolution and a suspension of the debt limit through 8 December. While this prevents a crisis in the coming weeks, it sets up for a battle in mid-December around the budget and the debt ceiling. Essentially Harvey pushed the potential fight around the budget and debt ceiling into the end of the year.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Creepy_Azz_Crackaah's picture

Has Krugman rebutted this yet?

Moar broken windows, bitchez...

StackShinyStuff's picture

Easy 2 step process to interpret the noise in the reports:

 

Step 1, if stawks go up, report is fine no need to do anything

Step 2, if stawks go down, analyze the report and adjust until stawks go up

SafelyGraze's picture

"slam the economhy" = "stimulate the economy"

Iskiab's picture

This report looks more like a revision on bad forecasting than actual effects of the hurricane. Jobless claims being effected before the hurricane actually hits?

TeethVillage88s's picture

They were saying it about Huston & new E-File system for unemployment.

Bank_sters's picture

From Cnbc:

Fed's Dudley- Hurricanes will boost economic activity over the long run

https//www.cnbc.com/2017/09/08/feds-dudley-hurricanes-will-boost-economic-activ...

 

Hammer823's picture

Hurricanes are GOOD for the stock market.

Just look at today's action.  Losses being erased as I write this.

The stock market is a completely rigged system.

Always buy the dips.

The powers that be have not let even a minor drop go unreversed in almost 10 years.

Every state and federal budget, 401k, pension, ira are dependant on ever increasing stock prices.

100 hurricanes wouldn't make any difference to our rigged market.

bobert727's picture

Wait....I thought these disasters were good for the economy and growth?

Antifaschistische's picture

As a Houstonian, even I am sick of all these federal bailout programs.  

If you chose to live close to the beach...the the risk should be on YOU and YOU only.  Not the taxpayer in Wyoming.

If you build a $1 million dollar home on a $3 million dollar lot along the "Bayou"...then that's on you.  NOT ME even though I live 5 blocks away.

If you chose to live in a mobile home in "tornado alley"...that's on YOU.

Even in Houston they are blaming the reservoir capacity expansion projects on the Federal Government.  Even though those reservoirs only protect a few hundred thousand inhabitants living between highway 6 and downtown.  (including my place)

You live somewhere that snows 20 feet a year why do I have to pay for your roof cave in with Fed Disaster money...

I just don't get it...what is wrong with people accepting responsibility for their own decisions.

 

 

Honest Sam's picture

Personal responsibility is an antediluvian concept that became obsolete when politicians first came to realize that the majority of human beans do not want, can not, or prefer not to pay for their own mistakes, and that they will vote for you to increase your power if you give them a chicken in every pot, take money away from their neighbors who earned it and give it to them, and sentence murderers to life but let them out in 5 years for good behavior.

There is a force operating in the United States, indeed the whole world, that considers nearly everyone exactly the same, and therefore no matter that you distinguish yourself (this does not apply to the ruling 1% who exempt themselves from the vagaries of life) as far above the masses, if you manage to get a bit more than your fellows and gals, you will give it up for the sake of the Collective.

It's communism, disguised as caring. 

 

newworldorder's picture

Responsibility starts at home. Have you seen much of it lately?

junction's picture

If natural disasters are an economic plus, Mexico is in great shape after that 8.1 earthquake yesterday.  How many times has North America been hit at the same time by giant hurricanes and a massive earthquake?  

---

From "Flash Gordon": 

The Emperor Ming: Klytus, I'm bored. What play thing can you offer me today?
Klytus: An obscure body in the S-K System, Your Majesty. The inhabitants refer to it as the planet... Earth.
The Emperor Ming: How peaceful it looks.
[He activates a console, and watches as earthquakes, floods, etc. start to occur. They both get a good laugh out of it]
Klytus: Most effective, Your Majesty! Will you destroy this, er, Earth?
The Emperor Ming: Later. I like to play with thing a while... before annihilation.
[laughs evilly]  

youngman's picture

Plywood..roofing supplies for Miami....and Drywall and carpet for Houston..good things to be in right now

two hoots's picture

I can see the long lines of returns of generators, plywood, osb, and all the junk people buy when the media and weather gone wild reports scare half the coastline from Texas to South Carolina.  Does HD and WMT own the Weather Channel?

Déjà view's picture

Carpetbaggers headed for Houston...

bidaskspread's picture

Goin to need to import that plywood, it's torched out west.

two hoots's picture

Gee, I miss the easy and peaceful back in the day times of Russian election manipulation, crazy tweet's and Hillary's blame game. Those were the good old days. 

wobblie's picture

Geoengineering has its upsides!

Sky flyer's picture

Maybe fat boy will put an actual warhead on this next missile test. That would be a good test for those stawk algos after the storm destroys half of FL.

Swamp Yankee's picture

If the BofA, aka Federation of Evil, or ‘F.O.E.’ told me that the sky was the blue I would look outside just to be sure.

 

If the American economy hits the rocks it is not because these chuds are being honest or competent.

 

Long on faith in the individual.

coast1's picture

ummm, I think b of a missed a couple of things....All the people who will stop paying their mortgages because they had no insurance, or insurance wont pay, and the insurance companies will go bankrupt....Yes, people are buying alot of supplies, but in other parts of the country where gas prices have skyrocketed will be buying less...

Honest Sam's picture

You don't really think that the FED and Treasury are going forsake insurance companies whose reserves will possibly be depleted. do you?

AIG, rinse and repeat coming to an insurance company near you.

There are few if any homes sold without insurance. Banks and mortgage companies insist on insurance or they won't issue the mortgage.

STop with Chicken little crap.

PitBullsRule's picture

You don't get any benefits out of fucking up your house or business or car.  A few companies, very few, will sell more materials, but they can only produce so much.  The only beneficiary of this will be the car companies, who will sell replacements.   Most of this will be bad.  People will abandon houses, because it will cost more to repair them than they are worth.  That will devalue entire neighborhoods.   People will leave their jobs, because the plant is destroyed and the employer can't pay them.  Agriculture will get more expensive and more scarce.  The blacks that are homeless, will walk around robbing people and then sleeping in the streets.  

There are no positive effects of this unless you sell cars, or drywall.  Furthermore, if you live in Hurricane alley, your days are numbered, this could happen again any year, and it could be worse.  Your insurance will go up, so your rent will go up, so the cost of living will go up, to live in the same crappy place.

its due to global warming, then you're fucked.  

TeethVillage88s's picture

Wealth Destruction... just like War.

Good time to talk about the Broken Windows Fallacy of Economics.

Honest Sam's picture

As in all things, it is the opportunists who come thru disasters with generation enriching megafortunes.

There are indeed positive effects for a good many who know how play with these natural disasters.  

Not just drywall manufacturers. 

The agri-businesses will score big. Blacks could get high paying jobs rebuilding instead of stealing and risk getting shot. This is the south, remember.

The glass is more than half full for those with some imagination and ambition. 

newworldorder's picture

So, you are saying it is better to rent than to buy?

TeethVillage88s's picture

So could Harvey and Irma be used to highlight statistical bull shit and financial weakness in our cities/states and federal govt?

- Unemployed & forgotten in rush for Globalism, NAFTA, CAFTA, TPP, TTIP, TAP
- Planned Inflation & bubble blowing economy harms our youth & fixed income citizens, harms social security
- High Debt Levels are unsustainable, scaling up debt & credit make our cities & states targets of BANKs
- Fake Financial rating haven't been fixed
- Mal-Investment expands with ZIRP/LIRP/NIRP
- Bond Markets No Longer Function
- GDP is fake, Inflation & Govt Spending need to be discounted
- Boskin Commission Reforms on CPI hide the real inflation rates
- We are dying in Debt from Health Care Costs, Housing Costs, Education Costs, Expensive Cars & Trucks, Transpo, Parking
- Money Stock Expansion makes the USD very vulnerable to collapse, Scaling up is unsustainable, Debt Levels too... WRC stewardship will he hammered in future G20 & IMF Agendas
- USA can not go into a World War with these Debt Levels, this Cost of Living, these price levels, this cost of Labor & MIC Contracts... This is a National Security Issue TODAY

So, Zerohedge... what storm issues will help turn this country around or reduce the Usury & Taxes & Foreign Trade?

Honest Sam's picture

Not the whole economy is going to be impacted by the hurricanes. 

With a minimum of $15 billion new borrowed and printed money, some opportunists are going to make huge fortunes and be able to retire in their 20s. 

Fecund Stench's picture

BoA also predicted everyone would use cheap gas to buy a pickup truck.

Trump has an opp not to suspend the Davis-Bacon act, as was done after Katrina.

https://www.jacobinmag.com/2017/09/hurricane-harvey-houston-charter-schools

Grandad Grumps's picture

But, broken windows and destructive wars are good for the economy, right? Everyone gets new, cool, modern stuff, right? Why would a destructive weather event be bad? Unless tragedy of all tragedies, criminal banks lose money.

CJgipper's picture

This should take the banks under since many houses are a loss due to flooding.  Bunch of people about to walk away from bad mortgages, especially in FL, if the insurance doesn't pay.  And then what?  More bank bailouts?????

Thethingreenline's picture

Do any of you think the Kardashians condo in Miami will make it?

TTGL

surf@jm's picture

Obamacare made health insurance unaffordable......

Next will be homeowners flood and auto........

Of course with laws requiring the purchase of such insurance, before long everybodys a criminal......

See how that works?.......

BitchesBetterRecognize's picture

......But Trump & congress removed the debt ceiling in order to print the fuck up, so BofA is playing dumb for awhile, and once QE4 goes full blown, they'll be the first to help with the paper bill distribution.....

 

It is nothing but the same bullshit to keep the FIAT scam going for as long as they can...... 

Maynard G Krebbs's picture

Well at least they won't be reporting  my late credit card payments to Equifax !