Assessing Hurricane Milton’s Economic Impact

Hurricane Milton will leave a significant trail of destruction in its path, and its impact on economic activity is anticipated to be notable, reducing real GDP growth in Q4 by an estimated 0.2 to 0.4 percentage points. Florida, facing the most direct hit, could see its gross state product growth in Q4 slashed by 3 to 4 percentage points.

GDP and asset loss: a dual narrative

It’s crucial to understand that the loss of assets — ranging from homes and businesses to vehicles and industrial equipment — doesn’t directly chip away at GDP, which measures expenditure on goods and services, not the value of lost assets.
 

Sector-wide shake-ups

The ripple effects of Milton will challenge multiple key sectors. Tourism in Florida, a critical engine for the state’s economy, is poised for a sharp downturn due to canceled trips and flights and damaged infrastructure. The construction sector will likely hit the brakes, with a forecasted drop in new home sales and housing starts. While retail saw a brief spike from emergency buying, this is just a temporary buffer and unlikely to compensate for the significant sales void during and after the storm. In the energy sector, Gulf region oil extraction operations could face shutdowns or slowdowns. Utilities are on high alert for widespread power outages that could further strain recovery efforts.
 

Labor market strains

Complicating matters, Milton’s timing — coinciding with a critical payroll survey week — will likely muddy the employment picture. The Bureau of Labor Statistics counts individuals as employed if they work at least one hour during the reference period. So, while some residents will be counted as working this week, many that have evacuated the area could be off the entire week. Further, a few workers might still be off in the parts of North Carolina destroyed by Hurricane Helene.
 

Policy puzzle for the Fed

As Federal Reserve policymakers consider policy adjustments at the November Federal Open Market Committee meeting, distinguishing between transient storm effects and underlying economic trends will be challenging. The anomalies introduced by Milton could obscure the real economic landscape, making monetary policy decisions all the more complex.
 

For now, Fed Chair Jerome Powell appears on track to convince his colleagues to vote in favor of a 25 basis points rate cut in November, but any notable weakening in underlying payroll growth, hours worked or the unemployment rate next month could still tip the scale in favor of a larger rate cut by data-dependent Fed policymakers. The difficulty, of course, will be distinguishing between fundamentals and weather distortions in upcoming economic data reports.
 

Broken window fallacy

One should be careful not to fall for the broken window fallacy — reconstruction efforts will entail greater spending (in part supported by government funding), but the economic gains will be spread over time and are unlikely to offset the economic output loss from the storm.
 

We expect a prolonged and staggered rebuilding process. The complexity of damage assessments, the ebb and flow of federal funding and insurance disbursements, and the logistical hurdles of large-scale rebuilding will extend the timeline. The early stages will heavily rely on the Disaster Relief Fund administered by the Federal Emergency Management Agency for immediate relief.