With the Palisades and Eaton fires just 27% and 55% contained, respectively, the ultimate impact remains unknown. With homes and businesses destroyed and families displaced, there will be devastating implications for the local economy.
Natural disasters impose severe hardships on families and communities, and our thoughts are with those affected by the wildfires in Southern California.
These events can also impact broader economic conditions. The Southern California wildfires have been burning for over a week, with the two largest blazes (Palisades and Eaton) still active. These two fires alone have burned nearly 40k acres of land and damaged/ destroyed over 12k structures. CoreLogic, a global property information and analytics firm, estimates the initial property losses from these two fires could total between $35bn and $45bn, and the total economic loss could be far greater.1 If these estimates hold true, this would be the costliest wildfire disaster and one of the costliest natural disasters in U.S. history.
With the Palisades and Eaton fires just 27% and 55% contained, respectively, the ultimate impact remains unknown. With homes and businesses destroyed and families displaced, there will be devastating implications for the local economy. For now, however, the national economy should be relatively immune to this shock.
- Growth impacts should be modest: California accounts for roughly 14% of total U.S. GDP. As such, behavior in Los Angeles County, the most populous county in both the state and the country, could influence national trends. That said, with only a fraction of the county’s population under evacuation orders and the availability of federal assistance, disruptions to national-level consumption should be modest. Moreover, since the fires have mostly affected residential rather than commercial areas, national business activity should also be largely unharmed. Importantly, GDP is a measure of current output, so the destruction of property built in previous periods alone won’t directly influence future GDP figures. Rebuilding efforts could boost residential investment, but with these efforts likely to be spread across multiple quarters, this boost may not be discernible in the GDP accounts.
- Negative employment impulse could be short-lived: Initial jobless claims in California rose by just 1,884 for the week ending January 11th, suggesting the fires’ impact on unemployment in the January Jobs report should be limited. BLS research2 shows large wildfires tend to have negative short-term implications for employment growth, and economists3 expect a drag of ~20k payroll jobs this month. That said, employment tends to recover quickly and select industries, such as construction, could benefit from rebuilding activity.
- Broader inflation dynamics should remain well behaved: With apartment vacancy rates below 5%, the Los Angeles County real estate market was already tight. As the fires exacerbate the supply-demand imbalance, local rents should rise further. However, rent measured in the CPI index reflects an average across geographies. Barring a broader spike in national rents, the inflationary impacts should be negligible.
Disasters like this highlight a broader challenge facing U.S. households: as natural disasters become more frequent and destructive, property and casualty insurers in at-risk areas may refuse to offer policies. Property values in affected areas will likely fall, although the rising cost of insurance could push prospective homebuyers elsewhere. With housing supply already limited, this could pressure national home prices even higher, pushing more Americans into the rental market and further from homeownership.