South-Western EconNews: Battering, Bailing and Floyd

Battering, Bailing and Floyd

Subject

Topic

Aggregate Demand/Aggregate Supply

Key Words

Industrial Output, Unemployment, Capacity Utilization

News Story

Economic-as well as meteorological-forecasts were made of the impact of hurricane Floyd, one of the most powerful storms in the past decade, on the East Coast. Floyd struck with strong winds, heavy rains, and destructive waves. Schools were canceled, businesses closed and there was considerable property damage. Floyd was forecast to cause considerably more damage than it did and to possibly be a drag on economic growth. Assessing the impact of hurricane Floyd has led some economists to conclude that the storm may actually boost economic growth.

One of the models for assessing the net impact of a devastating hurricane is the recent example of hurricane Andrew. Andrew hit the Miami area in 1992 and caused about $26 billion in damages or about .4 percent of gross domestic product. Although there was heavy property damage and many work-hours lost because of business closings and disruption, the rebuilding and replacement of goods contributed to an increase in GDP of 0.5 percent for the quarter that Andrew struck. Hurricane Floyd, which managed to avoid heavily populated areas, produced considerably less destruction than Andrew and Marilyn Schaja, chief economist at Donaldson, Lufkin & Jenrette, estimates that Floyd will lift GDP by 0.2 percent.

The economy continues to evidence signs of strong growth. Industrial output in August increased by .3 percent according to the Federal Reserve. Automobile production grew at a rapid 8.1 percent rate. Capacity utilization increased by .1 percent to 80.8 percent in August, the highest level since November 1998.

Labor market indicators, such as initial claims for unemployment and hours worked, are due to be released in the next few weeks and will bear the influenced of hurricane Floyd. Jobless claims are expected to rise and payroll data may be distorted. The Bureau of Labor Statistics (BLS) claims that the impact of Floyd on payroll data will be negligible. The BLS anticipated potential problems caused by Floyd and postponed data collection efforts from affected counties.

(Updated October 1, 1999)

Questions

1.	Using aggregate supply/aggregate demand curves, illustrate an economy initially at full-employment equilibrium.
	a)show the impact on your diagram of a severe hurricane that causes considerable damage to productive facilities.
	b)what is the impact of the hurricane on real GDP and the level of prices?
	c)what is the impact of the hurricane on employment and hours worked?
2.	Now assume that most of the damage is covered by casualty insurance. Show on your diagram the impact of the economy when consumers attempt to replace their property loss. Explain the conditions under which real GDP could increase.
3.	Hurricanes cause much destruction and dislocation. Some of the costs of a hurricane are counted in GDP others are not. Give an example of some of the effects of hurricane Floyd that would influence GDP. Give examples of other costs that are not reflected in GDP.

Source

Tristan Mabry, "Floyd May Leave Robust Economy in Its Wake," The Wall Street Journal, September 17, 1999.