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The US Economy Is About to Get Hit with the Costs of Disaster Relief

Sep 30, 2017 | Peter Christensen |

The US Economy Is About to Get Hit with the Costs of Disaster Relief

Harvey. Irma. Maria. Usually, they’re just names, but in 2017 they were three of the biggest hurricanes that ever made landfall, laying waste to Houston, Miami, Puerto Rico, and the US Virgin Islands. Experts estimate that at least $200 billion will be needed over the coming years to adequately repair and restore everything that was lost, and, as corporate profits drop like a rock due to huge insurance losses, the US economy will take a huge hit, including the US stock markets.

Some companies are forced to stay, many decide to leave

Oftentimes, after a major hurricane, the companies with the finances to pay a premium for labor, materials, and so forth bounce back much more quickly than companies without. Even worse for America’s big economies like Miami and Houston, while many of the larger businesses that are tied to the coast must stay (petrochemicals and shipping, in particular), many smaller companies are much slower to get back to work or, in some cases, simply pack up and leave.

The cost of reimagining infrastructure and construction

Another dagger to the economy is the fact that, with bigger and stronger storms forecast in the coming years, coastal cities like Houston, New Orleans, and Miami will need to completely rethink their infrastructure. Construction building codes will need to be tightened, restrictions will need to be made, and zoning laws will have to be changed—all of which takes huge amounts of time, effort, and money.

When insurance companies get hit, the stock market suffers

Insurance companies and reinsurers will be on the hook for big losses as the claims start flooding in (forgive the pun) from all three of these disasters. Everest Re Group Ltd (RE), XL Group Ltd (XL), RenaissanceRe (RNR), Validus (VR), and Aspen Insurance Holdings Limited (AHL) are some of the insurers that will take the biggest hit, and, when they get hit, their stock value will get hit as well. The fact is, these companies could be forced to raise capital in the form of equity sales, especially if their stocks lose over 20% of their book value.

Insurance companies aside, Goldman Sachs has already noted that the three disasters will have a “sizable” impact on the US economy, causing a “meaningful drag” on growth factors and boosting headline inflation because of increased gas prices.

In other words, expect the economy to flatten, inflation to rise, and stock prices to drop across the board, all thanks to storms with innocent-sounding names like Irma, Harvey, and Maria.