Home Economy Hurricanes Irma, Harvey apply brakes to U.S. economy

Hurricanes Irma, Harvey apply brakes to U.S. economy

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         Hurricanes Irma, Harvey apply brakes to U.S. economy

The mammoth U.S.economy is not easy to slow down, but the damage caused by hurricanes Irma and Harvey could reduce growth in the fall by as much as one-third, analysts say.

Before the back-to-back hurricanes struck, the economy appeared on track to expand as much as 3% in the third quarter running from July through September. Now forecasts are pointing to gross domestic product increasing around 2% or even less.

“What had looked like a brisk quarter might now be roughly 2%,” said economist Avery Shenfield of CIBC Economics.

If the economy were a car, in other words, the effect of the hurricanes would be to lower the speed to 40 miles an hour from 60. Not terrible, but a blow nonetheless.

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The aftershocks will linger for some time. The densely populated Houston region, heavily damaged by flooding, represents about 2.5% of the U.S. economy. And the state of Florida, all of which was exposed to Irma, constitutes about 5% of the nation’s economic activity.

The most obvious trouble will come in the form of properties destroyed, businesses closed and many people being unable to work. Some areas may not be restored for months.

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More broadly, the damage to key energy-producing and refining operations in the Houston region may keep gasoline prices from falling as much as they usually do after the end of the summer driving season. That will also raise costs for consumers and other businesses not in the path of the storms.

Based on similar damage from major storms since World War II, Goldman Sachs cut its estimate of third-quarter U.S. growth to 2% from 2.8%. Consumer spending, home construction and energy production are the most likely areas to be hampered.

Like a storm surge that initially withdraws water from low-lying areas before it floods back in, the U.S. economy is almost certain to see a surge in spending in the fourth quarter that largely or entirely offsets the negative drain in the third quarter.

Shenfield suggests fourth-quarter GDP could snap back to 3.5%, though Goldman is more conservative for now at 2.7%.

While nation is always less well off after a costly weather event, the rebuilding eventually does give a shot in the arm to GDP.

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