Two major hurricanes hitting North America in quick succession provide terrible images of human suffering and physical damage. This naturally leads to the question of how much it might hurt the economy.
There is a field of economic research devoted to the impact from natural disasters. Unsurprisingly, they can be very bad news for small, poor countries with limited sources of income (think Caribbean islands).
However, they cause little lasting damage to large, rich, diversified economies (think United States). In part this is because America has the resources to rebuild, through savings, insurance or government aid, and the ability to temporarily shift activity to other locations if necessary. Human capital is largely unaffected. In contrast, an island that is dependent on tourism and agriculture is going to be in big trouble, without foreign aid.
Two major hurricanes in the same quarter (and maybe more to come) will certainly drag down US economic activity and probably push up consumer prices as well momentarily. However, the impact should be short-lived. It will provide an entry to invest in strong business with sound leadership.
There is much evidence that natural disasters in rich countries are positive for growth in the medium term. GDP growth generally accelerates in developed countries because of the activity related to replacing assets, such as housing or cars that have been destroyed.
Hurricane damage is unlikely to have much impact on Federal Reserve or Central Bank policies that have been largely very accommodating for the investment climate. On the fiscal side the government will provide some funds for disaster relief. An even more positive consequence is that it provided some urgency to avoid the risk of a government shutdown or debt default.
Home builders such as KB Homes, Pulte Homes and DR Horton are poised to gain large contracts to rebuild affected areas such as Florida. We also favor commodity corporations who will be helped by higher prices such as orange juice and cotton prices. Due to the hurricane’s the supply of Florida’s largest commodity exports such as orange juice and cotton prices will go up dramatically so companies with existing inventories of these commodities will be able to trade with a much bigger margin.
Lastly, countries come together to help fellow countrymen during natural calamities. Communities coming together, increased government spending and specific industries enjoying margin expansion and higher sales (agricultural commodities and home-builders) will all equate to opportunities with massive upside in the very near future.