By Megan Leonhardt

The appalling scale of the vast and still growing Los Angeles wildfires puts the blazes out of the ordinary in terms of the economic harm they will bring.

While fires typically aren't as economically damaging as Atlantic hurricanes that make landfall in the U.S., the duration of the fires, and the fact that they are burning the country's second-biggest city, signal that this natural disaster is likely to rank with the recent Hurricane Milton and even Helene.

Economists expect employment setbacks, impacts on inflation and home-building, the potential for sustained swings in consumption, and even a discernible drag on national economic growth.

"The wildfires in the Los Angeles area have caused tragic loss of life and widespread destruction of property and could eventually have some implications on high-frequency economic data," says Ryan Sweet, chief U.S. economist at Oxford Economics.

Under the best-case scenario, the overall physical damage and hit to economic activity is likely to be between $2 billion and $3 billion, says Adam Kamins, senior director at Moody's Analytics. But the potential for worse effects is significant.

Economic Growth

Inflation-adjusted gross domestic product growth isn't constructed to directly capture the economic costs of natural disasters such as property damage -- it measures current production of goods and services. But it can indirectly pick up on shocks to the system, and in this case, that is likely to occur.

The Los Angeles wildfires could subtract 0.1 to 0.3 percentage points from annualized GDP growth in the first quarter, estimates Andrew Husby, senior U.S. economist at BNP Paribas Securities. He's expecting first quarter GDP growth to measure 1.9%, down from the 3.1% annualized quarterly growth recorded in the third quarter. The initial estimate of fourth-quarter GDP is due out Jan. 30.

The hit to economic growth, in some respects, is likely to come from lower output and consumption in the immediate wake of the fires. Restaurant dining in greater Los Angeles has taken a hit and power outages have plagued the area. The loss of major events, such as an NFL playoff game that was relocated from the city to Arizona, will likely add to the drag on state economic activity.

The damage to homes and infrastructure also will weigh on productivity and output, Kamins says. Estimates of insured property losses are around $30 billion so far, but uninsured losses could "easily" double that total, Husby says. That would make the recent fires the costliest in U.S. history, putting them among the top 10 overall natural disasters in American history.

Cleanup and rebuilding will start quickly once the fires are under control, which could help boost economic activity, but the process could take years, Husby said. That is especially true given the vast number of under- or uninsured properties, not to mention California's vulnerable insurance infrastructure.

"Ultimately, the price tag could start to look like something associated with major hurricanes, which tend to be far more disruptive from an economic standpoint due to their far larger scale," Kamins said.

Employment

Analyzing the 13 major California wildfires that took place over approximately the past three decades, Morgan Stanley economists estimate that more destructive fires usually had an effect on employment, but not always. Across all wildfires analyzed, the median payroll shortfall was only 3,000 workers, but it was 23,000 in the cases of larger wildfires.

Given the size and duration of the current wildfires, Morgan Stanley estimates payrolls in California will be down 20,000 to 40,000 in January.

On a national scale, Husby estimates the Los Angeles wildfires will have a negative effect of 14,000 to 27,000 positions on January nonfarm payrolls. His call could have been higher, but workers will be counted as employed by the BLS if they have received pay for the week of Jan. 12-18. That means workers who are paid biweekly or semimonthly would likely still have received some pay for hours worked during that period and would therefore be counted as employed.

The impact of the wildfires could be more apparent in hours worked, Sweet said. "To reduce employment, employees have to be off work without pay for the entire pay period," he said. "The wildfires' impact will likely be more visible in the household survey via the number of people not at work because of weather-related events."

Husby also expects to see a jump in the number of Americans filing for unemployment benefits. While wildfires typically don't result in a jump in initial jobless claims, Los Angeles' high population density and displacement of more than 100,000 people so far will likely result in an additional 5,000 initial claims in California for the week of Jan. 16, he said.

Inflation

The wildfires could worsen inflationary pressures as well. Core inflation, which excludes food and energy costs, is expected to accelerate by four to nine basis points, or hundredths of a percentage point, month over month post-wildfires, forecasts Morgan Stanley. Higher vehicle prices are mainly responsible.

The core measure of the consumer price index was 3.2% in December, the BLS reported on Wednesday. The index for used cars and trucks rose 1.2% month over month in December, while the gain for new vehicles was 0.5%.

Following the 2018 Camp fire that destroyed more than 18,800 structures and the slightly less damaging 2017 Tubbs fire, which both took place in Northern California, core inflation rose an average of nine basis points, researchers found. The shock was most pronounced for core goods prices, particularly on used and new cars.

Morgan Stanley economists expect that scenario to be repeated as a result of the Los Angeles fires.

Previous fires didn't have a meaningful, immediate effect on rent prices, which is good news for stubborn shelter inflation. But that doesn't mean that the rents won't react this time. Still, the impact will likely come with a lag of even six to nine months, says Diego Anzoategui, economist at Morgan Stanley Research.

Beyond inflation, there will likely be some downward pressure on home starts. Retail sales could also see a drag of about 15 basis points, on average, for two months of so-called control retail sales, a data series that excludes certain volatile categories. But the series is so noisy that we take that result with a "grain of salt," Anzoategui said.

Interest rates

Despite all that, the disaster isn't likely to change national conditions enough that it would significantly affect the Federal Reserve's decisions about interest rates.

Investors should expect policymakers to acknowledge the human toll of the disaster, but look through the potential short-term swings in the economic data. "The long-term effects on the Fed's mandated goals -- employment and prices -- are likely to be small," Husby said.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 18, 2025 02:30 ET (07:30 GMT)

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