The New Government Stimulus Program: How Major Hurricanes Lead to Higher Infrastructure Spending

Who knew hurricanes came in threes? After the devastation of Hurricane Harvey last week, at this writing, we await the landing of Hurricane Irma sometime this weekend. Hurricane Jose is waiting the wings, to come next week.

Just as there are no atheists in foxholes, there are no conservatives when it comes to disaster relief. Those who disdain the relief of others can find their positions undermined when the same situation happens to them. Just ask Texas Senator Ted Cruz, who voiced such disdain for helping the survivors of northeast Superstorm Sandy years ago, and has now learned that state and party parochialism has its limits.

The numbers for Hurricane Harvey are staggering. Something like $160 – 200 billion in damages, including approximately 500,000 autos. Less than half the devastation is insured. A bit of a hit to the oil refineries, but far more severe repairs needed for the petrochemical plants along the Texas coast, which provide much of the plastic raw materials that impact everything from trash bags to diapers. Roads are unstable. Bridges and rail lines are washed out. The efforts to restore the gulf coast part of Texas will be long and expensive. What damages Hurricane Irma and Jose will leave is anyone’s guess at this point. Irma’s potential trajectory is honing in on south Florida which has enormous population and infrastructure, with additional landings on either the east or gulf coast. Hurricane Jose is too early to tell.

With all of this impact, both actual and projected, one has to wonder how financial markets will take the news. Many are analyzing the impact of Hurricane Katrina back in 2005 for clues. However, New Orleans is not as populated or as vital to the economy as the Texas gulf coast area. While the destruction wrought on New Orleans and the Louisiana and Mississippi coast was great, it did not have the population density of Houston or south Florida. No doubt the impact to the country by this trifecta of hurricanes will be far greater than Katrina.

The impact of these events on the financial markets will be manifold. In terms of the economy, many industries will need to spend more or take in less revenue as the result of the storms, crimping profits for at least this year and probably next. Individuals will see their spending change from luxuries to necessities as rebuilding becomes a priority. 

At the Federal level, the provision for funding both current and future hurricane disaster relief will blow a hole in the budget for 2017-2018, which begins October 1. While no budget has yet been finalized, there is no provision for aid of this magnitude. The increase in the budget deficit from hurricane relief will make tax changes more problematic, and may result in any tax changes be delayed until October 1, 2018, if then.

The disaster expenditure will also make the need to increase the amount of debt issued by the Federal government all the more urgent. The political battle over the raising of the debt ceiling is expected to be more muted than originally thought, given the immediacy of the need for funds for the disaster relief survivors. The amount the ceiling is raised will dictate the timing of the next debate over this, which may come as soon as December of this year.

When December rolls around, expect a battle royale on the issue of the federal debt, which is a proxy for taxes and spending. Backers of the Tea Party, now called the Americans for Prosperity, want lower taxes and government enforcement of various social norms, including expulsion of immigrants. Infrastructure spending, for hurricanes or otherwise, is far down their list of demands.

It would seem that infrastructure spending would be more than hurricane repair and construction, and in reality it is. However, so stretched is the federal budget, that unless Social Security or Medicare spending is reduced, there is not a lot of funds left for repair and replacement of our country’s roads and bridges. Only higher government revenues in the form of more tax receipts would bridge the gap, but that requires more people working. Potentially expelling 800,000 immigrants, unless Congress acts, is not exactly a step in this direction.

Fiscal conservatives, who are less worried about social issues and more concerned about the borrowings of the government, want a smaller deficit. If immigrants want to work here and pay taxes, that’s fine with them. Issues like who people marry, whether they keep their gender, etc. is secondary to the financial health of the country. While they do not like taxes, they do not like deficits more. 

The core of Trump’s support is with the Tea Party, referred to as his “base.” The problem is, the base is not large enough to keep him in office. However, if he moves away from the issues of his base, he is ordered back in line by the like of Breitbart and other conservative media. On the other hand, the base is alienating more moderate Republicans, whose views are less strident. 

This may be laying the groundwork for a civil war inside the Republican Party. If the 2018 elections result in heavy losses for Republicans, there will be a battle royale for the direction of the party in terms of both fiscal and social issues. Many Republicans fear a split with the base will result in a permanent minority status. However, if moderate Republicans were to merge with moderate Democrats, some of whom feel equally alienated by their extreme party’s wing, there may once again be a party that represents the most voters, as opposed to the most motivated.

The Economy

The effect of the three hurricanes has yet to be part of any economic forecast. Still, history would seem to suggest that there will be a period of economic softness, followed by growth as the rebuilding gathers pace.

One complicating factor is the projecting of the termination of the “dreamers” program in six months. This program has permitted the children of illegal immigrants to remain in the country. 

While the President, who ordered their expulsion to satisfy a campaign pledge, expects Congress to send him legislation to overcome the termination. This act in itself has put the Republican Party in a quandary of coming down on this issue one way or another. Without the 800,000 persons who are otherwise to be deported, there will be a severe lack of labor to help rebuild the affected areas. Ironically, it was Trump’s self-imposed deadline on the subject that created the issue, which was first established by George Bush in 2001.


Inflation is set to go up, aided by the shortages of gasoline and petrochemicals, and abetted by the demands of reconstruction. 

No data has been released to incorporate these events. It will probably be the second quarter of 2018 before the impact of the disasters has run its course. However, the softness of the dollar relative to other currencies, unrelated to the hurricane landings, will give inflation an upward bias going forward.

Interest Rates

The hurricanes have given some at the Federal Reserve second thoughts about raising interest rates at this time. The increase, scheduled for later this month, may be put on hold.

In a speech in Jackson Hole, Wyoming, Fed Chairman Janet Yellen defended the regulations put in place after the economic crisis of 2007 as necessary to prevent another occurrence. In doing so, she may have signaled that she will not run for re-appointment, given that this position is opposite that of the President’s.

The Stock Market

Stocks as a group will find it rough going as the adverse impact of the hurricane damages become apparent. When the economy revives with the reconstruction programs in place, they should snap back.

If inflation or interest rates rise to a level that impacts earnings, the market will face headwinds that may not be easily overcome, given current valuation levels. 

                        Warren M. Barnett, CFA
                        September 7, 2017

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email
Close Menu