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Hurricane Charley: Not So Tough
Although the tempest devastated parts of Florida and soaked the East
Coast, it won't do much of a number on the U.S. economy

The physical impact of Hurricane Charley, which slammed into Florida
on Aug. 14, was immediately visible: downed trees, caved-in roofs,
smashed windows. But in economic terms, the full brunt of the Category
4 storm has yet to be felt. Action Economics looks at the key issues
that the storm will raise for the month's economic reports.


We would divide the impact of a natural disaster into two parts: an
immediate "disruption effect" and a later "response effect." These
effects can affect sales, production, price, and employment figures
differently, depending on two things: the timing of the event relative
to respective surveys, and what part of the week or month the disaster
strikes.

DARK DAY. A hurricane negatively affects sales during the event, but
the positive response effect afterward is significant. Households are
forced to choose between various options -- many of which are
expensive -- to address the crisis, and they later have to rebuild
homes.

If you follow the money, you might say that the inflow of insurance
payouts and federal assistance to a region will quickly translate into
spending that wouldn't otherwise have occurred. However, any loss of
income related to the event must be factored in. The net effect is
generally positive, because insurance payments are proportional to
wealth losses, which are big, rather than income losses, which are
generally small.

The negative disruption effect of a hurricane is greater for
production than for sales, and the positive response effect can be
smaller, as some lost production is never regained. In Florida,
approximately 1 million to 2 million homes -- representing 1% to 2% of
the national population -- lost power for a sizable portion of a day.
Service-sector activity such as utility output is mostly lost forever,
while goods consumption is somewhat made up for later.

UNYIELDING FORECASTS. Both the disruption and response effects of a
natural disaster have an upward impact on prices, unless the disaster
is so big that it has a negative impact on the overall economy.
Hurricanes drive up prices for locally produced goods and emergency
supplies, but in general, their impact isn't evident in national data.

Finally, the timing of an event like Charley is important. Storms that
occur on a weekend have less impact on production than on sales and
prices, and those that happen early in a month leave more time for a
recovery within the month. The monthly employment survey for the jobs
report introduces its own distortion, as events that occur during the
survey week have a magnified impact on the month's reported payrolls
data.

What does this all mean with regard to Charley and the August economic
data? We won't change our forecasts for the August employment report.
We still expect a rise in nonfarm payrolls of 150,000 and an increase
in the average workweek to 33.8 hours from 33.7, though the risk for
both measures has shifted downward.

GOOD TIMING. Retail sales for August should be dampened not only by
Charley's visit to Florida but also by the effects of the storm right
along the East Coast. Our forecast of a big 8% rebound in auto sales
will remain in place, and we still expect a hefty 1.2% jump in overall
sales for the month. Because Charley was preceded by a warning, retail
sales of some goods may have received a boost on the Thursday and
Friday before.

Housing data, such as starts as well as sales of new and existing
homes, should feel a chill from the bad weather in August. The
positive response effect will likely be spread across the coming
months and hard to decipher. We expect starts to remain at a 1.98
million annual pace for August. Construction spending for the month
may see a boost.

Industrial production will probably feel the greatest impact from
Charley for two reasons. August utility output may prove weak -- for
the third consecutive month -- and the report uses data from the
establishment survey for the workweek, which will be biased because
survey's timing. We're expecting a 0.6% gain in industrial production
as vehicle assemblies and utility output in locations outside of
Charley's path rebound, but the gain will be restrained by weakness in
data from the South.

The good news for output in general is that the bulk of the disruption
from the storm occurred over the weekend and the storm was early in
the month.

MINIMAL DAMAGE. Finally, economists once had to calculate the effect
of insurance payments on service consumption and international service
trade in both the month and the quarter of events such as hurricanes.
Insurance claims for Charley -- estimated at between $7 billion and
$14 billion -- would have indeed had a significant effect under those
rules. But the U.S. Commerce Dept. has altered the treatment of
insurance claims and reinsurance payments so that the distortion on
consumption, service trade, and current-account data is presumably no
longer an issue.

This is not to say that Charley won't have an economic effect. Wealth
can shift from global insurance firms to U.S. insurers, and then from
U.S. insurers to the Florida economy. These effects, however,
shouldn't have a quantitatively significant impact on the quarterly
growth rate for third-quarter gross domestic product or on the U.S.
current-account deficit. While Charley sure packed a punch, the
economic bruises appear destined to fade.