Saturday, September 9, 2017

Hurricanes and the WNY economy

As Texas and Florida have been ravaged by hurricanes, most of us who choose to call Western New York “home” watch the news horrified yet revel in our decision to live in an area where the worst thing that can happen is a snow storm. We think that here -- 1,300 miles from Houston and 1,200 from Miami – we are safe and sound and fully protected from the hurricanes.

Sure, we might be from weather standpoint, but economically, we all will be feeling some pain.

It won’t be as great as that suffered by those having to replace their homes and worldly possessions, but we’ll be seeing our dollar shrink nonetheless, courtesy of the laws of supply and demand and the resulting price inflation.

It starts with plastics.

Those ubiquitous petrochemicals comprise or hold most everything consumers purchase, whether it’s a durable good, a beverage, a cleaning solution or packaged foods. Almost three-quarters of all the ethylene used to produce plastics is made in Texas along the Gulf of Mexico. The plastics corridor was right in Hurricane Harvey’s sights and two-thirds of the US ethylene production was shut down by flooding, damages, and outages. Industry experts don’t know when all the plants will be back online, nor do they know when the transportation infrastructure will be ready to handle those plants’ inputs and outputs.

Manufacturers who utilize Texas-made materials aren’t being very optimistic. The big boys like Newell Rubbermaid have cut back on 2017 earnings forecasts their while the little guys like Confer Plastics have warned their customers of pending supply and price issues (those plants damaged by hurricanes will have to recoup their losses somehow).

Plastic is everywhere. So, don’t be surprised if retail prices go up over the next six months for anything under the sun. And, if you work in any of the local automotive or healthcare factories or food and beverage processors that make things out of plastic, don’t be surprised when you see those machines being idled as supplies wane. 

Similarly, oil is refined in Texas, too, which is why prices at the pump are rising dramatically. In many locales across the northeast, gasoline prices have risen by 30 cents in the past few weeks and there seems to be no end in sight to the growth. For a typical WNY commuter that will be a few hundred dollars lost over the next twelve months if prices stick. According to Moody’s investment services, every penny increase in gasoline prices reduces consumer spending by $1 billion over the course of the year.        

Then there’s the issue of building supplies, their prices and overall supply.

There will be considerable repair and rebuild underway in Texas. As I write this, Irma has not yet hit Florida, but if the forecasts hold true, there will be devastation. You’re talking about two incredibly-populated states having to fix what happened. Harvey alone is likely responsible for $30 billion in property damages. That’s a lot of lumber – in a lumber market that has already seen prices jump by 31 percent this year because of America’s little trade war with Canada. Another 30 percent due to the hurricanes would not be unexpected.

Then, having access to building supplies is another issue. Rebuilding will affect the macro and the micro in ways you’d never expect.

I always use an anecdote from Hurricane Katrina to make that point. Back then, we were making gazebos at the factory that had smoke windows on them so those inside that gazebo had some privacy. After Katrina we had to suspend their production for a couple of months because we couldn’t get the smoke windows. Why? Building codes require homes along the coast to have smoke colored windows near ground level so sea turtles don’t go towards lights at night thinking it’s the sun.

That’s peculiar cause and effect that you will be happen in various ways and with a wide variety of products after the water settles in Texas and Florida.

What will we be looking at in regard to overall inflation? The higher gas prices have already accounted for a half-a-percent of inflation nationally. Over the 12 months will consumers see all goods and services rise by a whopping 5 or 6 cents on the dollar or more? That’s certainly foreseeable given that just over 2 has been the norm for our economy in recent years. 

There’s an obvious domino effect – and a wide-ranging one at that -- when it comes to natural disasters. We may be far away from the epicenter of the damage, but we will still see our dollars float away, even here in WNY.  

From the 11 September 2017 Greater Niagara Newspapers

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