Hurricanes and Other Disasters

Disasters--such as Hurricane Katrina, the terrorist attacks of September 11, 2001, and other major catastrophes--affect economic activity because (1) production is interrupted, (2) structures, equipment, and other assets are damaged or destroyed, (3) transactions, such as payments of insurance benefits or government disaster relief, take place as a result of the damages incurred, and (4) the structures, equipment, and other assets that are damaged or destroyed must be replaced, often using funds from insurance benefits or disaster relief.

GDP by state and GDP by metropolitan area are measures of a state or metropolitan area’s current production of goods and services and will reflect any disruption in that production. These measures are not directly affected by the loss of property (structures and equipment) produced in previous periods.

In general, yes. In fact, RIMS was used to analyze the economic impacts of Hurricanes Andrew in 1992 and Charley in 2004. However, using RIMS multipliers for analyzing the impacts of natural or man-made disasters requires care, because such disasters can cause substantial changes to the structure of the local economy.

Natural or man-made disasters may impact measures of state personal income in two ways: they may disrupt the flow of income in the economy (typically reducing it in the short run and boosting it later); and they may temporarily lead to increases in transfer receipts. BEA's estimates of personal income reflect both types of effects.

BEA's measure of property and casualty insurance services that is included in GDP is an estimate of the value of the services provided by the insurance company to its policyholders. Insurance companies provide financial protection to policyholders through the pooling of risk, and they provide financial intermediation services through the investment of reserves that are held to help cover extraordinary losses.

Losses of and non-repairable damages to the stock of fixed assets (structures, equipment and software) associated with a disaster do not affect CFC. CFC reflects the decline in the value of the stock of fixed assets due to wear and tear, normal obsolescence, normal accidental damage, and aging. In the event of a disaster, losses to the stock of fixed assets are not considered "normal" and therefore should not be included in CFC as a charge against income earned from current production.

In the case of Hurricane Katrina, substantial damage due to flooding occurred, particularly in New Orleans. Many of the affected properties were covered by the National Flood Insurance Program (NFIP) which is classified as a government enterprise in the NIPAs. Consistent with the treatment of private insurance companies, the benefit payments made by the NFIP in response to catastrophic events are treated as capital transfer payments. (See also FAQ#55 "How are GDP and related income measures of the national accounts affected by a disaster?")

The effects of disasters—such as hurricanes, terrorist attacks, and other major catastrophes—on the international economic accounts are embedded in the source data that BEA uses to produce the statistics. Source data providers generally cannot isolate those effects, and thus, BEA cannot separately quantify the impacts of the disasters. Nevertheless, there are several possible impacts of the disasters on the international accounts as discussed below.

Under a new treatment adopted in 2009, foreign transactions associated with losses recovered from insurance companies following certain natural or man-made disasters are included in the capital account, which is a component of net lending and borrowing in the NIPAs. To the extent that losses are insured (or reinsured) by foreign insurance companies, capital account transactions (net) will reflect increased inflows for the period in which the disaster occurs. As a result, net lending or net borrowing in the NIPAs changes in a positive direction.

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.