Hurricane Harvey: The Case For Major Negative Economic Consequences

Business, China, Company Strategy, Economics, US

USHousingStarts

By John Richardson

THE most important thing here is the human cost. Thirty lives had already been lost as a result of Hurricane Harvey as I wrote this post. Let’s hope that if this number must rise, it doesn’t rise by many more.

But at times like this chemicals and other companies have to of course also think about the economic impact of natural disasters such as this one. It would be dangerous to only assume that Hurricane Harvey will deliver a boost to economic growth. You need to plan for a downside scenario. Here are just some of the reasons why:

  • As the above chart indicates, US housing starts have mainly been rising because of activity in the southern states, and have anyway already started to decline. Few people will now be building new homes before the spring because of the focus on disaster recovery. Each new home in the US includes $16,000 worth of chemicals and polymers, according to the American Chemistry Council (ACC).
  • Auto sales will receive some kind of boost because of the flood damage. But it will take a while for the insurance companies to start paying out – and the stock at the dealerships will all have been ruined, so the pipeline will take time to refill. And Mark Vitner, senior economist with Wells Fargo, warned that when someone bought a new cars they felt better as GDP also rose. “But the total stock of wealth has not improved because a car has been destroyed,” he added. Each new light vehicle built in the US includes $3,000 worth of chemicals and polymers, the ACC again estimates.
  • Insurance companies are going to take a big hit, meaning that interest rates will probably have to increase again, no matter what the Federal Reserve does next. Vitner also warns that insurance companies are these days paying out less and less.
  • Early reports indicate many Texans don’t have flood insurance. This will only be adequately compensated for if the Texas, Louisiana and Federal governments can find enough funds.

Catalyst for a stock-market sell-off

Hurricane Harvey could be the catalyst I have been warning about. As pessimism builds over the economic damage caused by the hurricane, investor attention may also focus on long-term US economic weaknesses. The FT highlights these weaknesses when it writes in this article:

One of the great ironies of the 10 years following the financial crisis is the way in which low interest rate monetary policy — which was designed to get Main Street USA back up and running and to help people buy homes and start businesses — has bolstered share prices and the markets more than it has helped ordinary Americans.

The economic damage caused by Hurricane Harvey could also combine with a failure by the Trump administration to achieve meaningful tax reform and infrastructure spending by the end of this year. The understandable distraction of having to deal with Hurricane Harvey might not help the White House.

A further risk is that all of this negativity roils stock markets just as consensus is reached that China has started to export deflation compared with last year’s reflation. China’s credit cycles have a huge bearing on global economic growth. The data from China is already telling us that Beijing has launched a major new cycle of credit tightening.

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