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Floyd and the Fed
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September 15, 1999: 11:02 a.m. ET
Hurricane could cause swings in jobs, retail data, but unlikely to impact rates
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - As the Southeast U.S. braces for Hurricane Floyd, economy watchers also are closely tracking the storm, saying its devastation could influence key indicators from retail sales to employment statistics over the next couple of months.
But economists doubt the variations would have any impact on whether or not Federal Reserve policy-makers raise interest rates either next month or before the end of 1999.
As of Wednesday morning, the powerful storm appeared headed for landfall somewhere in the Carolinas. During the day, Floyd was expected to speed up gradually and take a northerly path, sparing northern Florida and Georgia from a direct hit.
Already, some retail sales have been boosted as millions of people have bought plywood, bottled water and other supplies in preparation. Economists say that if the huge hurricane is as devastating as feared, many businesses could be wiped out and workers could lose their jobs, causing a small -- and temporary -- run-up in unemployment. Retailers could lose inventories and see their businesses shut down temporarily.
When major disasters strike, "the typical things that happen is that you reduce employment, production, income and spending in the areas that are affected, principally because everybody's holed up in their shelter or in a basement waiting for it to pass," said Alan Levenson, chief economist at T. Rowe Price in Baltimore. "Obviously money is not made or spending is not done as it normally would be."
However, on the plus side, construction and retail sales could boom in the wake of such a disaster as people try to rebuild, economists say.
Somewhat oddly -- and probably of little comfort to those who could lose homes and property in the storm -- the country's gross domestic product could get a bounce from the hurricane, notes Doug Lee, head of the consulting firm Economics From Washington.
Lee said production in the affected areas is generally disrupted for several days during a storm, but then, once the disaster is over, there's a scramble to make up for lost work and the reconstruction effort begins.
"It could have a small negative effect on the third-quarter GDP number, but that is probably going to be more than offset by the larger positive effect on the fourth-quarter GDP," he said.
The follow-up days also could create a pop in construction spending, housing starts and retail sales, as people rebuild homes, buy new furniture and carpeting and businesses restock supplies.
Lee said Floyd could increase demand for building materials, leading to higher prices. "We've had very strong building activity for quite some time, and we were seeing shortages in those areas," he said. "Having a disaster on top of that -- you may see more price increases than you normally would."
One of the first indicators to watch after a hurricane, economists say, would be the number of people filing for first-time jobless benefits, data Wall Street tracks each Thursday to gauge the strength of the labor market. That would give some anecdotal evidence as to the numbers of people who have directly lost work because of the storm, Levenson said.
But economists caution that in an economy as big as the United States', the economic impact likely will be slight even if the hurricane damage is massive. In the labor market, for example, they say the tight labor market would allow most people to find new jobs relatively easily.
"The real question is if there's a lot of damage due to the storm, that could interrupt business for a longer period of time," says Richard Rippe, chief economist at Prudential Securities. "But generally speaking, these kinds of things are not major economic developments although they can disrupt things briefly."
Economists also say that even though the Federal Reserve carefully monitors fluctuations in key economic indicators in deciding such things as interest-rate policy, the Fed is extremely unlike to rely on disaster-related factors in weighing whether to hike rates again.
Plus, as Wall Street awaits the Fed's Oct. 5 meeting, the key monthly indicators that could show a "hurricane effect" won't be reported until later in October or November.
"The Fed won't be confused by this, in no way shape or form," Rippe said.
But like everyone else, economists are watching the storm to see just how destructive Floyd turns out to be.
"I guess we'll just have to wait and see how bad it is," Lee said.
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