Irene’s Impact on Fragile U.S. Economy

By Lucia Mutikani | August 31, 2011

The struggling U.S. economy should escape largely unscathed from Hurricane Irene and may even get a boost from reconstruction.

Irene, which killed about 40 people when it dumped 5 to 15 inches (12 to 38 cm) of rain over wide swathes of the U.S. East Coast on Saturday and Sunday, will have only a negligible impact on gross domestic product, analysts said.

“It may take a little bit out of third-quarter GDP, a 10th (of a percentage point) will likely be the most we will see,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

“But given the clean-up and rebuilding, we will get that back in the fourth quarter and a little bit, particularly as insurance and federal money flow into the affected areas.”

Risk management firm Kinetic Analysis Corporation estimates the total damage from Hurricane Irene at $7 billion.

That is a drop in the bucket compared with the roughly $100 billion bill from Hurricane Katrina in 2005 and the $40 billion in damages inflicted by Hurricane Andrew in 1992.

Katrina, which claimed many more lives and was the most destructive hurricane ever to strike the United States, led to a spike energy prices. Even so, it caused only a temporary slowdown in growth.

“Even if there were no offsetting losses and all the reconstruction was completed in the second half of the year, the maximum impact on growth would be only about 0.2 percentage points to third-quarter and fourth-quarter GDP,” said John Ryding, chief economist at RDQ Economics in New York.

Economists said Irene could have packed a bigger punch and derailed the fragile economic recovery if it had damaged oil refineries, destroyed farm land or shut down one of the major cities in the Northeast for an extended period.

“The good news is that Hurricane Irene was not as intense as feared. By the time it hit the densely populated mid-Atlantic and New England regions, it had been downgraded to a tropical storm,” said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York.

“Typically, the most potent disasters include a spike in oil prices, which spreads the shock through the national economy.”

High gasoline prices and supply chain disruptions after Japan’s March earthquake and tsunami held back the U.S. economy in the first half of this year.


The U.S. economy barely grew in the first six months of this year, and prospects for an acceleration in growth in the second half of the year have dimmed in the wake of a sharp stock market sell-off and slumps in both business and consumer confidence in August.

Although Irene will drag on the economies of states along the northeastern seaboard, as a result of damaged roads and homes and shuttered businesses, the impact should be temporary.

“Many will be without electricity for a few days. This means fewer people reporting to work and some businesses will remain closed,” said Meyer. “But this is only estimated to last a few days, and hence will have a negligible impact on productivity and output.”

While Irene could push up weekly claims for state unemployment benefits for a few weeks, it will not have an impact on the government’s count of employment for either August or September, according to analysts.

The hurricane hit well after the survey period for August’s nonfarm payrolls count, which will be released Friday.

“It falls midway between the August and September survey periods and will therefore have little direct impact on measured employment,” said RDQ Economics’ Ryding.

The effect on employment over time may be positive but negligible.

“The $7 billion estimated property loss of Irene is equivalent to about 0.9 percent of total construction output in a year,” said Ryding. “If we were to see a 0.9 percent increase in construction employment as a result of Irene, this would only add around 50,000 jobs over time to nonfarm payrolls.”

In the near-term, Irene could support retail sales and consumer spending in August, which economists estimate took a knock early in the month from a steep drop in share prices and in consumer confidence. However, it could have a negative impact on some regional manufacturing activity.

“We should get a little boost to spending at building materials and grocery. They are going to be the winners prior to Hurricane Irene,” said Sweet, of Moody’s Analytics. “Because of the power outages we are going to see some sales from August shifted to September.”

Though Irene came at a bad time for state and local governments, which are low on cash, money from the federal government for reconstruction could provide a temporary boost to construction employment.

Government spending has contracted for three straight quarters. While it could contract again in the third quarter of this year, analysts now expect it to rise in the final three months of the year.

(Reporting by Lucia Mutikani; Editing by Leslie Adler)

Topics USA Catastrophe Hurricane

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