Economists say the fire in Los Angeles had a limited impact on the national economy By Reuters
Written by Michael S. Derby
(Reuters) – The devastating fires in the Los Angeles area may put a small strain on the U.S. economy in the near term but are unlikely to derail the strong momentum going forward, economists said.
Forecasters think that asset destruction and labor market disruptions may put upward pressure on inflation as they slow growth and put a slight brake on hiring, though not to a large enough extent to change the outlook.
“The LA wildfires appear to be the costliest natural disaster in American history, due to their size and the high number of homes destroyed,” said JP Morgan economist Abiel Reinhart.
Noting estimates that put economic damage costs in the quarter-billion-dollar range and surpassing the costs 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 the US domestic product was $30 trillion in 2023, for comparison.
Economists at Goldman Sachs agree and say past natural disasters provide clues as to what to expect.
They foresee a 0.2-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 due to the fire, a very small amount of drag on the economy that added 256,000 jobs in December, resulting in only about 0.5% of California residents. they were under some sort of evacuation order.
Goldman Sachs forecasters do not expect the fires to increase unemployment insurance claims any time soon.
Morgan Stanley (NYSE:) analysts are roughly on the same page as it projects between 20,000 and 40,000 job creation levels. They note inflationary pressures as measured by consumer price inflation and food and energy costs are likely to be four to nine percentage points higher from the effects of the fire.
“The shock is reflected in asset prices, in particular, in used and new cars,” Morgan Stanley forecasters noted. “We find evidence of an increase in used and new car prices after the wildfires” based on similar disasters, while “the main assets that were cars do not seem to be visibly affected.”
JP Morgan’s Reinhart said “we expect local upward pressure on hiring, construction supplies, and residential construction workers, but limited national results.”
The relatively contained national economic impact of the California fires comes as the US economy enters 2025 at a healthy level with strong inflation rates. That said, the crisis adds to an already high level of economic uncertainty with the return of Donald Trump as president, who has campaigned on a platform of massive tax increases and deportations of undocumented immigrants.
