The sheer scale of the devastation from hurricanes Harvey, Irma and Maria is hard to fathom. Places where we have friends, relatives and clients, and where many of us have vacationed, have been reduced to rubble. As with all natural disasters, the immediate needs of those whose lives have been affected cannot be overlooked. The short-term and long-term effects of these (and any future) hurricanes will play out as they have over history – first clean up the mess, then rebuild.
The short-term impact will show up as uneven economic data resulting from the massive disruption to the regions hit by the storms—areas that represent somewhere between six to ten percent of U.S. economic output. Widely watched data series such as retail sales, factory output, energy production and unemployment claims will likely show storm-related weakness in the next few months before normalizing. Using previous storms such as Katrina/Rita for comparison (2005), U.S. GDP will most likely suffer a near-term drag of a couple tenths of a percent followed by similarly sized boosts in the first half of 2018.
We have already seen initial unemployment claims jump post Harvey/Irma, much as they did after previous hurricanes. The chart above shows that the employment markets quickly corrected after the initial storm-related hiccup.
The airline industry, which was already experiencing soft conditions this summer, was hit hard during the tail end of vacation season. Those airlines servicing the Caribbean may have more prolonged challenges. The cruise industry reported strong bookings prior to Irma/Harvey/Maria, and has been able to reroute ships away from the damaged ports of St. Maarten, St. Thomas and Puerto Rico, which represent an insignificant amount of total capacity for the cruise lines. Luckily, ports of call are relatively easy to change in the Caribbean.
The auto industry may see a silver lining in the hurricane clouds. The industry was facing increasing unsold car inventories and declining used car prices. The hurricanes hit areas that represent about ten percent of new car sales in the country. Early estimates are 600,000 to one million vehicles will need to be replaced over the next few months. This should lead to replacement demand for both new and used vehicles, which is good news for an industry that is sorely in need of it.
The Gulf Coast (hit hardest by Harvey) is home to almost half of U.S. oil refining capacity and 50-60% of U.S. base chemical production (ethylene, propylene, methanol, resins, etc.) The impact to the oil refining industry will be felt across many sectors as output was shut down and has been slow to come back online. We are already seeing higher prices and shortages of some specialty chemicals and resins, affecting a myriad of consumer products. Fortunately, these interruptions are transitory in nature and markets will quickly normalize once capacity is brought back online. Also, note that the Mexican earthquake simultaneously disabled much of that country’s refining capacity, exacerbating the shortages of refined fuels caused by Harvey. Additionally, there was some interruption of drilling activity in Texas’ Eagle Ford area that will easily be absorbed by a U.S. market awash in crude oil.
Cleaning up and rebuilding from the destruction should provide a boost to home improvement stores. Providers of building materials and equipment should see a prolonged uptick in demand for rebuilding in affected areas. Building products, coatings, construction materials, lumber and tools will all be in demand. Home improvement stores started shifting needed material to the Gulf Coast in their supply chains in anticipation of heavy demand. Our analyst, Mark Adelmann, CFA, commented that the hurricanes hit at a time when housing markets in the affected areas were already tight and apartment rents correspondingly high with little to no excess inventory. Home furnishing sales should also see an uptick in demand as flood damaged furniture and carpeting are replaced.
Lastly, we’ll touch on the insurance industry. Our own analyst, Lisa Snyder, CFA, who covers the financial sector, points out that hurricanes have multiple sources of damage, and not all are covered equally by insurers. For example, homeowner policies do not cover flood damage – that is covered by the National Flood Insurance Program run by the federal government. Most property and casualty insurers have offloaded much of the catastrophe risk to reinsurers and alternative capital providers which will be on the hook for the bulk of the storm-related losses. Further, Lisa comments that the big property and casualty insurers should be able to increase pricing after years of flat and falling premiums. Insurance stocks took an initial hit after each of the recent hurricanes, but if history is any guide, these declines may present themselves as good buying opportunities for long-term investors.
Past disasters suggest the affected regions will rebound and financial markets typically look through the short-term disruptions to the economy and focus on the long-term fundamentals. The good news is that a prosperous and diversified country like the United States has the resources to respond to natural disasters.