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The Positive Spin from Hurricanes

By David Wyss As government agencies add up the costs of Hurricanes Charley, Frances, and now Ivan, economists like me wonder how much damage these storms will do to Florida's economy and finances. And will they significantly impair the national economy?

Here's a contrarian view: Hurricanes are good for gross domestic product. It's counterintuitive, sure, but it's true. These tropical twisters have two economic impacts: Disruption and destruction. The disruption reflects the inability of people to get to work or to shopping malls and the damage to factories, hotels, infrastructure, and more that costs people jobs and incomes. The destruction is the loss of lives and of property that needs to be replaced. Disruption costs GDP, but rebuilding of destroyed property adds to it.

CITRUS CONCERNS. It's too early to estimate the impact of Hurricane Ivan, and the full costs of Frances and Charley are still being tallied. Although the three storms together are unlikely to exceed the $45 billion damage done by Hurricane Andrew in 1992, they're clearly bigger than the $9 billion in damages from Hurricane Hugo, the next most costly U.S. hurricane. So far, 51 deaths in the U.S. have been blamed on Frances and Charley and 12 on Ivan.

Yet, the economic disruption from the recent hurricanes seems moderate. Floridians lost a few days of work, and damage to tourist facilities and flight cancellations have hurt the state's economy. Some of the income loss will be made up, as industrial outfits put people on overtime to offset the loss of output. But Florida is heavily oriented toward services, and losses there aren't as easy to make up. Fortunately, this is the off-season for tourism, which limits the damage.

Even harder to make up will be the agricultural losses. Florida officials estimate that Frances and Charley have caused $2 billion in crop destruction, or about one-third of Florida's annual agricultural income. The heaviest hits are to citrus, where the crop is expected to drop 73 million boxes, to 200 million. The trees appear to have survived relatively undamaged, so the loss should be only to this year's crop.

Orange-juice futures are up 30% since Charley hit, which will be some mitigation for citrus farmers. The reduction in national consumption should be minimal, however, since inventories are high and plenty of Latin American crop will be available.

CREATIVE DESTRUCTION. On the national level, the monetary losses are smaller than for Florida. Yes, places like Disney World and other tourist attractions in the Sunshine State have taken a hit. But most of the money families don't spend in Orlando will be spent somewhere else. Although Florida has seen about $5 billion in disruption ($2 billion in agriculture, $1.5 billion in tourism, $1.5 billion in other fields) from Charley and Frances, this will be partially offset by increased output elsewhere in the U.S.

On the other hand, destruction helps boost GDP because it requires rebuilding. In the third quarter, the increased sales of plywood and immediate repair work -- including overtime pay for utilities and public-service employees -- will add to GDP. Home repair and reconstruction will add even more.

About half of the $30 billion in destruction is to public utilities and other infrastructure, the rest is mainly residential. The rebuilding of the damaged properties will increase employment and GDP.

BALANCING ACT. Overall, the impact on GDP will be a bit difficult to predict. Growth will be reduced slightly in the third quarter by the hurricanes' disruptive impact, net of repair activity that has been done by the end of September (including homes being boarded up before the storms). The net loss is in the $3 billion to $4 billion range (not including Ivan), which will reduce third-quarter GDP growth by 0.1 percentage point.

However, if the repair and rebuilding is done mostly over the next three quarters, this could increase real GDP growth by 0.2 percentage points in the fourth quarter and 0.1 percentage point in the first half of 2005. Ivan will increase all these numbers in proportion to the damage done.

About half of the repair and rebuilding will be paid for by insurance and a quarter by government funds, including the latest $2 billion authorized for relief. Private companies and individuals will have to come up with the rest. These efforts will generate income for contractors, plumbers, and other workers. Companies such as Home Depot (HD) and Lowe's (LOW) will see a jump in September store sales, but most of the gains will accrue to smaller enterprises, especially local home-repair and construction outfits.

A BOOST FOR PHOENIX? Another consideration is the longer-term damage to Florida's image, which is very difficult to assess. Any lessening of Florida's allure isn't likely to affect U.S. GDP much, since second homes will be built elsewhere, if not in Florida. Past hurricanes suggest the impact will be temporary. Tourists will come back quickly, since the damage to tourist facilities seems to be minor (at least so far).

Property values may be lowered temporarily, and retirees may start to look at Phoenix more closely, but unless hurricanes become annual events, the normal migration patterns are likely to reemerge within a couple of years.

Though it's too soon to tell now, the hurricane's effects on September's employment, construction, and retail sales will be reported in coming weeks. But after the third quarter, the effect of the storms on output and employment should be positive, not negative. Wyss is chief economist for Standard & Poor's

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