Friday, February 6, 2009

Mother Nature's idiosyncratic stresses added to macroeconomic woes

It is now obvious that this recession is bad and getting worse; and with policy still hanging in the balance, there is still an overhang of troubling economic uncertainty. But don't forget the idiosyncratic weather shocks in 2008 that contributed to the ongoing macroeconomic stress.

The aggregate economic shocks that threw this economy into recession were quite drastic:
  • The crash of the subprime mortgage market brought the entire U.S. housing market tumbling down. Prices continue to decline, slashing household wealth at record rates.
  • The credit system froze, bringing the financial crisis to a head. Equity and bond markets jointly crashed, slashing earnings across the board.
  • Oil prices surged to record rates, driving up gas and energy prices and stripping consumers of their non-energy disposable income.

These aggregate shocks affect the economy as a whole, and by now, the disease is spreading at a quickening rate. Eventually the economy will turn around, but the time frame comes into question as policymakers grapple.

But something else happened this year that goes largely unannounced: record idiosyncratic shocks to key regions of the U.S. jointly stressed the aggregate economy. Specifically, Mother Nature hit key regions with record hurricanes and wildfires.

The 2008 hurricane season set records. From ABC in Houston:

The 2008 hurricane season was, as expected, more active than normal. For the first time since 1886, four tropical cyclones made landfall in one season along the western Gulf coast. And for the first time ever, six consecutive storms made landfall in the U.S. This was also the first season that major hurricanes developed over five consecutive months in the Atlantic basin, which also includes the Caribbean Sea and Gulf of Mexico.
There was a temporary loss of crude oil and natural gas production, but more importantly, the hurricanes slashed the Texas state budget by $1.7 billion. Spending has been cut through 2011 in response to the hurricane expenditures, and the Gulf communities are in need of extra funding for their rebuilding efforts.

California’s 2008 wildfire season was horrendous. From the Stormwire:
We've never seen anything like this in terms of acreage burned," said John Heil, a spokesman for the Forest Service's regional office.

Overall, the California Dept. of Forestry and Fire spent about $204 million combating the June fires. In the average fiscal year, the agency spends about $225 million fighting fires across the state, said Janet Upton, spokeswoman for Cal Fire's Sacramento headquarters. This year's June firestorm nearly surpasses that mark on its own.

More than 800 wildfires burned simultaneously across Northern California in late June, when a freak electrical storm ignited countless acres of dry shrubbery, according to Storm Exchange.

Heil said that the 2008 fire season will likely be one of the most expensive in the state's history. In Northern California, where wildfires were raging as recently as mid November, state officials are also expecting huge firefighting costs.
According to the article, the state has spent $676 million battling the fires, or three times the average during a fiscal year, $225 million. The effects on the California stock of housing, productivity, and wealth must be huge.

And now, many are still without power from the January 27-28 ice storm that plowed through the Midwest.

RW: These idiosyncratic shocks jointly affected the aggregate economy. Roughly 20% of the U.S. population lives in Texas or California, and joint shocks to these states – budget, productivity, housing – add up to macroeconomic problems. 2008 was truly a stressful year on the aggregate and regional levels.

Rebecca Wilder

2 comments:

  1. California's problems go way beyond just the wildfires. The state government is every bit as bloated and mismanaged as the federal gov't, hence the forced non-paid vacations for workers. (See the news forom CA today.) It was the world's sixth largest economy, I think, until relatively recently so you can imagine the affects.

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  2. This reminds me of "Atlas Shrugged." As the economy and society fell apart, one of the repeated themes was people blaming things on natural disasters and acts of god and lost their ability to overcome unexpected problems.

    It may or may not be the case that on a macro scale last year was bad. But you'd have to show a year by year comparison on overall losses from natural disasters- to include secondary effects on supply chains and whatnot. 2008 may have had abnormally bad hurricanes and wildfires, year X may have had abnormally bad earthquake and snowstorm damage, etc. Just on a gut level, 2008 didn't seem abnormally bad overall, certainly not as bad as 2005 with Katrina.

    I'd argue that Katrina is an indication that we're losing resilience and the ability to bounce back or mitigate natural disasters, and that's a more foreboding problem in my mind.

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