Good Night, Irene
Federal Reserve (Fed) Chairman Ben Bernanke’s widely anticipated speech in Jackson Hole, WY last Friday (August 26) apparently struck just the right tone for markets. The speech allowed market participants to look ahead to several key economic and policy events this week, including the impact of Hurricane Irene in the economy and markets, the August reports on ISM manufacturing, chain store sales, vehicle sales and most importantly, employment, as well as key data on China (August ISM) and Japan (July industrial production, retail sales, and vehicle production).
On the policy front this week, the Fed will release the minutes of the August 9 FOMC meeting, and perhaps more importantly, German Chancellor Angela Merkel holds a key policy conference with her own caucus as the market continues to wait for a policy response from Europe. Japan’s ruling party will choose a new Prime Minister from its own ranks, after the current Prime Minister resigned on Friday, August 26. As with elsewhere around the globe, the path of future fiscal and monetary policy in Japan is crucial to the outlook for the global economy.
Further out on the horizon for markets on the policy front is the now two-day long September Federal Open Market Committee (FOMC) meeting on September 20 and 21, some type of policy actions in Europe (see this week’s Weekly Market Commentary), a jobs proposal from President Obama, and ongoing work by the so-called congressional “super committee” tasked with finding at least $1.5 trillion in budget savings by the end of this year.
Potential Economic Impact from Hurricane Irene
Another, shorter term concern for markets is Hurricane Irene, which made its way up the East Coast over the weekend of August 27 – 28. As of Monday morning, August 29, damage estimates were in the $5 to $10 billion range. Table 1 shows the costliest hurricanes in United States history in terms of economic damage. Although the damage from Irene was less than feared, it caused major disruptions in a very heavily populated area of the country, keeping businesses closed and consumers at home for several days in the key back-to-school shopping season. The high frequency economic data (i.e. initial claims, shipping and rail traffic, weekly retail sales, consumer confidence, auto production, etc.) we, other market participants, and policymakers track may be difficult to interpret for a few weeks due to the impact of the storm. This potential lack of clarity on the underlying health of the economy arrives at a particularly inopportune time, as markets and policymakers try to gauge the true underlying strength of the economy and the risk of recession.
Although several major public transportation systems from the Metro in D.C., to the MBTA in Boston were closed for all or part of the weekend of August 27 – 28 (and some remain partially closed as of Monday morning, August 29), it appears that most of the other major economic infrastructure (ports, roads, airports, railways, refineries, utilities, etc.) related assets in the path of the storm were largely spared. Flooding remains the largest concern in the aftermath of the storm, especially in New Jersey, New York, and Vermont. If authorities take longer than now expected to repair the infrastructure, the hurricane may have a longer lasting impact on the economy in the region, and would push the United States economy closer to recession. Prior to the storm, we place the odds of recession at around one-in-three, up from a few weeks ago, but well below the odds financial markets seem to be placing on a recession.
As previously noted, very preliminary estimates put the economic cost of Irene at between $5 and $10 billion, In terms of economic damage (adjusted for inflation), at $108 billion, Katrina (2005) was the costliest hurricane ever to hit the United States. Andrew (1992) at $45 billion was next costliest, followed by Ike (2008), Wilma (2005), Ivan (2004), Charley (2004), Hugo (1989), Rita (2004) and Agnes (1972). These storms (again in 2010 dollars) caused between $10 and $20 billion in damage. Irene may end up in the lower end of that $10 to $20 billion category in terms of economic cost, although the true cost of the storm may not be known for weeks. Three storms that took the same track as Irene — up the East Coast — and were roughly the same magnitude as Irene: Floyd (1999), Bob (1991) and Gloria (1985) were the 14th, 30th, and 30+ most costly storms in history. For perspective, the size of the United States economy is around $15 trillion dollars.
Table 1
Costliest Hurricanes to Hit the United States (In 2010 dollars)
Rank Name Year Cost (Billions) Area Impacted
1 Katrina 2005 $105 Gulf Coast
2 Andrew 1992 $45 Florida/Louisiana
3 Ike 2008 $28 Texas/Louisiana
4 Wilma 2005 $20 Florida
5 Ivan 2004 $20 Florida/Alabama
14 Floyd 1999 $9 Mid Atlantic/Northeastern US
30 Bob 1991 $3 North Carolina/Northeastern US
30+ Gloria 1985 ~$1 Northeastern US
Source: National Hurricane Center
