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How Stocks, Economy Will Suffer From Irma, Harvey

Hurricanes Harvey and Irma are likely to deliver a combined hit
of at least $290 billion to the U.S. economy, equal to about
1.5% of annual GDP, according to estimates by AccuWeather Inc.
This comes while stocks, as measured by the S&P 500 Index
(SPX), are in a fragile position, essentially having traded
sideways for about three months. The economic blow from Harvey
and Irma will flow through to reduced corporate profits,
putting further downward pressure on stocks.

Tallying the Cost

Uninsured losses from Harvey alone could exceed $200 billion,
more than the costs of Hurricanes Sandy and Katrina combined,
according to estimates by Fundstrat Global Advisors LLC cited
by CNBC. A full accounting of the effects may not be possible
until far into 2018, the Wall Street Journal indicates.
AccuWeather projects the cost of Harvey to be $190 billion and
that of Irma to be $100 billion.

Harvey alone will reduce third quarter U.S. GDP growth by as
much as one full percentage point, according to analysis by
Goldman Sachs Group Inc. (GS)
cited by CNBC. This report was released on Saturday,
a day before Irma made landfall in Florida. Goldman’s analysis
was based on preliminary estimates of damage and economic
disruption from Harvey. Economists surveyed by the Journal are
less pessimistic than Goldman, expecting that third quarter
U.S. GDP growth will be lower by 0.3 percentage points,
followed by no impact in the fourth quarter, and a boost of 0.2
percentage points in the first quarter of 2018.

Goldman expects third quarter economic weakness due to Harvey
“to reverse over the subsequent three quarters, more than
recouping the lost output,” per CNBC. Similarly, the economists
surveyed by the Journal do not expect lasting effects from
Harvey, and thus are leaving their forecasts of GDP,
unemployment, inflation and other major indicators unchanged
for 2018. However, they do foresee various distortions over the
next few months. (For more, see also:
How to Financially Prepare for a Hurricane

Impact on Jobs, Inflation

Goldman expects that Harvey may reduce employment by somewhere
between 20,000 and 100,000 jobs in September, and that a hike
in gasoline prices will add about 0.2 percentage points to
annual headline inflation.

Economists surveyed by the Journal forecast that there will be
about 81,000 fewer jobs created in the third quarter than
otherwise, that there will be little impact on the fourth
quarter, but that there will be a boost of about 39,000 jobs in
the first quarter of 2018, driven by rebuilding efforts.

Sector Impacts

The main short-term impacts of Harvey, Goldman says, will be
felt in consumer spending, business inventories, housing and
energy, per CNBC. With gasoline production and distribution
interrupted by Harvey, given that Houston is a major refining
center, prices have shot upward. The Journal cites research
indicating that a one cent increase in the price of gasoline
reduces consumer spending on other products and services by
about $1 billion, and that Harvey has raised average gas prices
by about 31 cents per gallon nationwide, with another 9 cent
rise likely. Historically, such storm-related effects on gas
price subside within a few months, the Journal says.

Housing starts in the region hit by Harvey have been delayed.
When the area dries out, there will be increased competition
for workers to rebuild damaged or destroyed housing and
commercial buildings. The Journal points out that paying for
uninsured damage, which it estimates at $100 billion, is bound
to reduce household wealth. (For more, see also: 8 Stocks
Poised to Rise in Hurricane Harvey’s Wake

Recessions and Bear Markets

“Markets tumble all the time, but have a way of coming back, as
long as the economy continues to grow,” Barron’s reports, whereas “when a drop is
accompanied by a recession, watch out.” Recent examples offered
by Barron’s are the bear market of 1973-75, the bursting of the
tech bubble in the year
2000, and the Great
that began in 2007, preceding the Financial Crisis of 2008.
In all these cases, an economy in recession, if not necessarily
the cause of a bear market, certainly added to its severity. If
the effects of Hurricanes Harvey and Irma prove to be longer
lasting than anticipated, touching off a genuine recession,
investors have added reasons for concern.

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