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Hurricane Ian Will Cause Short-Term Economic Hit, Economists Say

The Wall Street Journal. logo The Wall Street Journal. 9/30/2022 David Harrison
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Hurricane Ian will likely weigh on U.S. economic growth through the end of 2022, economists say. Beyond that, the rebuilding and recovery will nudge up economic output over the coming years.

The hurricane pummeled fast-growing communities along the southwest coast of Florida, causing between $25 billion and $40 billion in insured losses, according to an early estimate by Fitch Ratings. Widespread power outages, closed airports and impassable roads will slow the economy’s reopening. More damage is likely as the storm headed for Georgia and South Carolina on Friday.

Greg Daco, chief economist at EY Parthenon, estimated the storm could lower Florida’s economic output by about 6 percentage points in the third quarter. That will shave about 0.3 percentage points off nationwide economic growth from June to September and roughly 0.1 percentage point in the fourth quarter of the year, he said.

Natural disasters often cause a short, sharp economic contraction in affected areas. Businesses close temporarily and residents either flee or hunker down in their homes.

But some of that lost economic activity is slowly made up in subsequent years when federal disaster assistance and insurance payouts allow for rebuilding.

“I expect people will stop going to restaurants for a while, the nightlife in Tampa will probably not be the same, there might be some businesses that are forced to close,” said Tatyana Deryugina, an economist at the University of Illinois Urbana-Champaign. “On the other hand, there will be destroyed cars, destroyed housing that needs to be rebuilt, and people will go out and spend money and that will drive GDP up.”

One factor that could complicate and lengthen Florida’s rebuilding is the shortage of construction workers and materials that has pushed up prices. The price that producers pay for inputs to residential construction rose 10.6% in August from the previous year. The rate of growth has slowed since last year but remains well above where it was before the pandemic.

Construction worker wages were up 5.3% in August from a year ago. In 2019, by contrast, year-over-year wage increases averaged 2.9% a month.

In the long run, many disasters such as hurricanes have relatively modest economic impacts, economists say.

“Generally, natural disasters don’t have structural effects on economic activity,” Mr. Daco said. “What’s been destroyed eventually gets rebuilt or gets transformed.”

That suggests the affected areas around Fort Myers or Tampa, which had been rapidly growing before the hurricane, won’t suffer permanent damage.

The unemployment in both the Fort Myers and Tampa metropolitan areas in August was 2.7%, lower than the national rate. Both areas have seen a rapid influx of population during the pandemic. Florida’s economic growth has outpaced the country’s every quarter since the beginning of 2021.

One advantage is that Florida is used to major storms and has prepared for them. In May, the state set aside $2 billion to help insurance companies deal with claims.

That has helped stabilize borrowing costs for the state and its local governments, which should help in the reconstruction, said Denise Rappmund, a senior analyst at Moody’s Investors Service.

“From a credit perspective, generally these issuers are able to withstand these natural disasters and come out OK,” she said.

For instance, the small Florida town of Mexico Beach bounced back relatively rapidly from Hurricane Michael in 2018, according to a Moody’s report. The storm destroyed about 1,600 housing units in the town. A year later, 160 properties had been sold and land prices were back to where they were before the storm, the report said.

In the long term, people who live in the path of a hurricane can actually see their employment prospects improve, thanks to the rebuilding effort.

A 2016 study by economists at the U.S. Census Bureau and the Bureau of Labor Statistics found that earnings of people affected by hurricanes outpaced those who weren’t affected within three years of the storm, likely caused by higher labor demand during the reconstruction. Those higher earnings in many cases more than completely offset income losses in the immediate aftermath of the storm, the study found.

A study earlier this year by Brigitte Roth Tran and Daniel Wilson, both of the Federal Reserve Bank of San Francisco, found that counties hit by natural disasters see higher per capita incomes after eight years than they otherwise would. House prices are also higher, they found.

“Despite the immense toll that disasters take, local economies in the U.S. have generally recovered successfully in terms of income,” they said.

Write to David Harrison at david.harrison@wsj.com

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