Devastating fires in the Los Angeles area are likely to put modest pressure on the US national economy in the near term but are unlikely to derail strong forward momentum, economists say.
Forecasters reckon the fires’ destruction of property and job market disruptions could put upward pressure on inflation as they also slow growth and put a modest brake on hiring, although not at a large enough level to fundamentally change the outlook.
“The L.A. wildfires are shaping up to be the costliest climate disaster in US history, which stems both from their size and the high value of the residential real estate they are destroying,” said J.P. Morgan economist Abiel Reinhart.
Noting estimates placing the economic damage cost in the quarter-trillion-dollar range and outstripping the cost of Hurricane Katrina, Reinhart said “we think the short-term effect on national GDP growth, employment, and inflation will be small.” The total size of US domestic product was just shy of $30 trillion in 2023, for comparison.
Goldman Sachs economists concurred and said past natural disasters offer clues for what to expect.
They foresee a 0.2 percentage point drag on first-quarter growth assuming that is not offset by rebuilding-related activity. Job growth in January is likely to be reduced by between 15,000 and 25,000 positions as a result of the fires, a relatively modest amount of drag in an economy that added 256,000 jobs in December, driven by the fact that only about 0.5 per cent of California residents were under some form of evacuation order.
US stocks ended mixed on Tuesday as investors gauged the latest inflation data and braced for quarterly earnings reports to justify high stock valuations.
Goldman Sachs forecasters do not expect the fires to push up immediate claims for unemployment insurance either.
Morgan Stanley analysts are roughly on the same page and project between a 20,000 and 40,000 drag on job creation levels. They note inflation pressures as measured by the consumer price index stripped of food and energy costs are likely to be four to nine basis points higher on fire impacts.
“The shock seems to be on core goods prices, particularly, on used and new cars,” the Morgan Stanley forecasters noted. “We find evidence of stronger used and new car inflation after wildfires” based in similar disasters, while "core goods ex-autos does not seem to be meaningfully affected.”
J.P. Morgan’s Reinhart said “we expect localized upward pressure on rents, construction supplies, and residential construction labor, but limited national effects.”
The relatively contained national economic impact of the California fires comes as the US economy is entering 2025 on a strong footing and sticky levels of inflation. That said, the disaster adds to what was already a heightened level of economic uncertainty with the return of Donald Trump as president, having campaigned on a platform of huge tariff increases and the widespread deportation of undocumented immigrants.
Source: Reuters
Bd-pratidin English/Fariha Nowshin Chinika
