Disasters--such as hurricanes, terrorist attacks, or other major catastrophes--affect economic activity because (1) current production is affected, (2) structures, equipment, and other assets are damaged or destroyed (and must be repaired or replaced), and (3) transactions, such as payments of insurance benefits or government disaster relief, take place as a result of the damages incurred. BEA’s National Income and Product Accounts (NIPAs) and Fixed Assets Accounts record catastrophic events as disasters if either the associated property loss or the insurance payouts exceed 0.1 percent of GDP (in 2012, about $16 billion in current dollars).
(1) Impacts on current production (or GDP)
GDP is a measure of the nation's current production of goods and services; as such, it is not directly affected by the loss of property (structures and equipment) produced in previous periods, except to the extent that it affects production capacity. And while GDP includes the value of insurance services produced for policyholders, this value is not directly affected by the payment of benefits in the wake of a disaster. (See “How are property and casualty insurance services measured in GDP?"). Moreover, while GDP may be affected by the actions that consumers, businesses, and governments take in response to a disaster, these responses are generally not separately identifiable, and they may be spread out over a long period of time. For example:
- Rebuilding activity, which may occur over many months following a disaster, will typically be reflected in the regular source data that are used to estimate residential and nonresidential investment. There is no way to disentangle the disaster-related rebuilding from other construction activity.
- Businesses may temporarily close, or tourism and other types of consumer spending may be canceled or postponed in the face of a disaster. However, whether spending is canceled or postponed, the results will usually be embedded (and not separately identifiable) in the source data that underlie estimates of consumer spending.
- Similarly, disruptions of production-related income are generally embedded in the data on which the income estimates are based. The impact of a disaster on gross domestic income, national income, or personal income cannot be quantified because the source data record actual activity and do not generally identify the effects of the disaster.
(2) Damage or destruction of assets
Neither GDP nor the associated income measures are adjusted to take account of damage to, or destruction of, assets due to a catastrophic event. Depreciation schedules and the NIPA measure of depreciation—consumption of fixed capital (CFC)—reflect normal accidental damage as well as the decline in the value of the stock of fixed assets due to wear and tear, normal obsolescence, and aging. As disaster losses are not considered normal, they are not included in CFC as a charge against income earned from current production. Instead, disaster losses are recorded as negative "other changes in volume of assets" when accounting for changes in the net stock of produced assets.1 These estimates are published annually in NIPA Table 5.10 Changes in Net Stock of Produced Assets (see lines 28-36) and in the fixed assets accounts tables 1.7 Current-Cost Other Changes in Volume of Assets for Fixed Assets and Consumer Durable Goods and 1.8 Historical-Cost Other Changes in Volume of Assets for Fixed Assets and Consumer Durable Goods. (See also “How are the fixed assets accounts (FAAs) impacted by disasters such as Hurricane Katrina and Superstorm Sandy?”). Additionally, estimates for disaster losses are published annually and quarterly as addenda items in NIPA table 5.1 Saving and Investment by Sector (see lines 59-65).
(3) Insurance payments and government disaster relief
Insurance payments. As noted, the loss of capital associated with disasters does not directly affect current production. Likewise, many of the disaster-related insurance payouts from private insurance companies and from government insurance programs, such as the federal National Flood Insurance Program (NFIP) or Florida’s Citizens Property Insurance Corporation, relate to the rebuilding, repair, and replacement of homes, other structures, or equipment that were damaged or destroyed by the disaster.2 Therefore, the NIPAs do not record them as current income for the claim holders or as a charge against insurance companies’ current profits. Instead, the values of disaster-related insurance payouts and government benefit payments are recorded as capital transfers, which are presented in NIPA table 5.11 Capital Transfers Paid and Received, by Sector and by Type. This treatment preserves the current accounts’ focus on the major macroeconomic flows of current business activity.
Government disaster relief. Although the impacts of disasters cannot always be separately identified in the source data used to estimate GDP components, certain impacts on specific categories within the government current receipts and expenditures account can be identified.
For some disasters, many people become eligible for federal and state assistance or extensions to benefits they already receive. For example, these benefits include, but are not limited to: Unemployment Insurance benefits, food stamps, Medicaid, Temporary Assistance to Needy Families (TANF), and Federal Emergency Management Agency (FEMA) disaster assistance payments. As a result, estimates of government social benefits will increase, reflecting increases reported in the underlying source data.
In addition, the federal government may provide grants-in-aid or capital transfers to state and local governments affected by a disaster. These grants may be directed to the following areas: housing, civilian safety, education, transportation, and income support, social security and welfare, as well as capital grants for infrastructure (roads, water treatment, etc.). Increases in grants are generally embedded in the source data used to produce these estimates.
1 Net stock equals previous period net stock plus investment minus depreciation and other changes in volume of assets. "Other changes in volume of assets" for the government sector consists of disaster and war losses.
2 The NFIP is classified as a government enterprise in the NIPAs, and as such, its treatment in the NIPAs is consistent with the treatment of private insurance companies.
More information on the treatment of disasters is available in the March 2009 Survey article, “Preview of the 2009 Comprehensive Revision: Changes in Definitions and Presentations.”