2017-08-28 15:26:02
Pricing a Disaster: Markets Are Signaling That Hurricane Harvey Won’t Crush the Economy

Hurricane Harvey is a disaster of monumental proportions that will destroy vast amounts of property and upend millions of peoples’ lives. But it also appears that the overall economic toll, at least for the United States as a whole, will be modest. And that surprising fact offers important lessons about how the modern economy works.

That benign view of the economic impact of the storm is the immediate verdict of financial markets Monday, which showed no signs of expectations that there will be broad ripple effects.

The stock market was essentially flat at midday. Bond prices are also little changed; if investors expected lasting damage they would most likely would have bid up bond prices, seeking safety and anticipating a slower pace of interest rate increases from the Federal Reserve.

And despite the Texas Gulf Coast’s central role in American energy production, oil prices are not exhibiting the kind of spike they did after Hurricane Katrina in 2005; the price of West Texas intermediate crude fell Friday and Monday.

Gasoline prices are a different story, having risen because of refining capacity being shut down amid the storm. But the 9 percent rise in the price of gasoline futures in the last week is the kind of swing that happens routinely, and has brought price only back to around their late-July level.

This subdued reaction from Wall Street may seem surprising. After all, Houston is the fourth-largest American city and is at the center of a metropolitan area with economic output of half a trillion dollars a year. The New Orleans metro area economy, devastated by Hurricane Katrina 12 years ago, is one-sixth as large. And the economic consequences for Texas indeed look likely to be severe, as Houston and the Gulf Coast face years of rebuilding.

But when you pick apart the ways a disaster — even a huge one — can affect the overall economy, it becomes clearer why financial markets and economic forecasters are so sanguine.

Disruption to production and supply lines. The Gulf Coast is a center of oil drilling, refining, and chemicals manufacturing. The details of how those industries will be affected are not yet clear, and the possibility of damage to production and distribution facilities is real.

There are likely to be power outages, and there is already severe flooding of roads and other transportation infrastructure. Industrial facilities themselves may be damaged by floods. But one thing that the Hurricane Katrina experience, among other disasters, has showed is how effective modern corporations are at overcoming those kinds of logistical challenges.

In the early days after that disaster, there were fears about disruptions to incoming supplies of coffee and bananas and about Midwest grain normally exported via barges down the Mississippi River. If you look at the overall data from that year for those and other affected commodities, though, there’s not much evidence of any lasting problems, reflecting the ability of corporate supply chain and logistics managers to find other ways to get products to market.

Financial losses. In theory, a natural disaster could deliver such severe losses to insurers, banks or other financial institutions as to cause broader economic problems.

There’s not much evidence of that happening because of Harvey for a few reasons. Home insurance policies generally do not cover flooding, which means the severe flood damage should have less impact on insurers’ payouts than you might expect. For many individuals, the financial losses from flooding can be devastating. But the possibility of the kinds of systemic problems that ripple across global financial markets appears remote.

Insurers’ balance sheets are relatively strong after years without mega-catastrophes demanding particularly enormous payouts.

Rebuilding costs. One of the paradoxes of disaster economics is that they can actually be good for economic growth, at least the way “growth” is commonly measured.

The need to rebuild or repair flooded buildings in Texas could create a surge in economic output in the state in the months ahead, generating higher growth in gross domestic product. This is a macabre artifact of economic accounting — no one would suggest that people are actually better off when billions of dollars worth of capital is destroyed. But it is how the math works.

If this disaster had happened in a period like 2009 or 2010, when the housing bust had left millions of people — especially construction workers — unemployed, the need to rebuild homes and businesses in Houston might have worked like stimulus spending.

But it’s not 2010 anymore. The unemployment rate among construction workers peaked at 27.1 percent in February 2010, but is now down to 4.9 percent. There aren’t a lot of qualified, idle construction workers. Perhaps the availability of well-paying jobs rebuilding homes in Texas, doing mold remediation work, and other tasks that will be in high demand could even coax people into the labor force who have been on the sidelines. In that case, the effort that goes into rebuilding Houston may create a bit of a boost to G.D.P., even if much of it comes at the cost of economic activity elsewhere.

The storm continues to wallop the Gulf Coast, and it’s premature to declare that the economy is in the clear. But the initial evidence suggests that the human damage is far greater than the economic damage.