How do natural disasters impact consumer spending?

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Listener Jacqueline Gardner asks: 

How do the widespread disasters we see on nightly news affect consumer spending, housing starts, etc. that you report on daily?

Hurricanes Helene and Milton may have caused at least $100 billion worth of damage.

Regional economies tend to rebound after natural disasters, but hurricanes and other weather events devastate the area’s infrastructure, hit housing starts and drive down consumer spending and employment temporarily. 

Hurricanes Helene and Milton made landfall about a month ago, leaving many in the South without a source of income. In October, the U.S. economy added just 12,000 jobs after adding 223,000 jobs in September. 

“After a major disaster, there is a decline in spending because there’s also a decline in earnings,” said Robert Hartwig, a clinical associate professor of finance at the University of South Carolina. 

Those drops tend to be proportional, said Adam Rose, a research professor at USC and a senior fellow at the school’s Center for Risk and Economic Analysis of Threats and Emergencies. 

“If your income goes down by 10% you’ll spend approximately 10% less on each product that you purchased before,” Rose said. 

But spending can jump before a natural disaster as people stockpile goods. Just before Hurricane Ian made landfall in Florida in 2022, residents bought an extra $387 million worth of food, up 128% from the week before, according to a forthcoming study from Ahmad Zia Wahdat, an economist at Purdue University, and Jayson Lusk, an economist at Oklahoma State University. 

Hurricanes are the most costly weather-related disasters, inflicting over $1.3 trillion in damage since 1980, for an average of $23 billion per storm, according to the National Oceanic and Atmospheric Administration. 

But overall, natural disasters usually don’t have a large impact on U.S. GDP, with the exception of Hurricane Katrina, according to a research briefing from the economic advisory firm Oxford Economics. The firm said Hurricane Helene won’t impact its fourth-quarter GDP forecast. 

Recovery efforts can actually boost regional economies. Southern California, for example, was in an economic slump in the 1990s after defense spending dropped. But the Northridge earthquake helped the region bounce back, Rose said. 

“You had a lot of insurance payments made. You had government assistance,” he explained. 

Government assistance can come in the form of Disaster Supplemental Nutrition Assistance benefits, which can stoke consumer spending. 

After Hurricane Ian, people who got those disaster benefits spent more on goods and services. There was a 9.5 percentage-point daily increase in the amount of money they spent using their debit cards, according to Wahdat and Lusk’s study. 

Natural disasters may have some effect on the housing market, albeit a small one. 

For example, single-family housing starts in the South fell by 137,000 units, or 23%, year over year in July, to the lowest level since 2020, wrote John O’Trakoun, a senior policy economist with the Federal Reserve Bank of Richmond. During this time, Hurricane Beryl made landfall in Texas. 

In contrast, single-family starts only fell by 1.4% in the West, and increased by 17% in the Midwest. 

But natural disasters may not be the sole reason behind the annual decline. Multifamily housing starts actually rose 25% month-over-month in the South, O’Trakoun wrote. High pre-existing inventory may have depressed single-family buildings. 

Cities and states suffer damage that can’t be measured. But if you’re looking at metrics like GDP and employment levels, many regions prove to be resilient over time. Florida’s economy, for example, has rebounded after large-scale disasters, Hartwig said. 

“By every measure Florida is a demographic and economic juggernaut, irrespective of the frequency or severity of these disasters,” Hartwig said. Florida has the fourth-highest gross domestic product in the country, generating about $1.6 trillion in economic output last year. Florida’s employment levels have grown steadily since 1976, the oldest data available from the Labor Department, although there have been some dips. 

There are exceptions, like New Orleans, which saw its population decline after Hurricane Katrina struck in 2005, Hartwig pointed out. Katrina had a “devastating impact” on the tourism industry and had a long-lasting depressing effect on the city that wasn’t offset by the influx in insurance dollars or federal aid, he said. 

Between 2000 and 2006, the population dropped by about half, and as of 2020, is still down 20% from 2000 levels. In total, Hurricane Katrina caused an estimated $160 billion worth of damages and losses. 

The New Orleans-Metairie metro area employed more than 600,000 people at its peak in 2005, and has yet to fully recover those numbers. 

Hurricane Katrina may be an outlier right now, but hurricanes are becoming even more destructive due to climate change. 

If global warming continues, the U.S. will eventually be unable to offset the economic losses caused by hurricanes due to supply chain disruptions, according to a study out of Potsdam Institute for Climate Impact Research.

“There is a limit of how much the U.S. economy can take, we just don’t know exactly where it is,” said Anders Levermann, one of the study’s authors.