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An early assessment of Hurricane Harvey's potential economic impacts

30 August 2017 Karl Kuykendall

Hurricane Harvey and the ensuing tropical storm have devastated communities along Southeast Texas spanning from Corpus Christi through Houston and into Beaumont. Houston has experienced record breaking rainfall with more on the way. More than 300,000 customers lost electricity across Texas over the weekend, and FEMA estimates that 30,000 will be housed in shelters while 450,000 will seek some sort of disaster assistance. With widespread flooding and rain still falling, economic activity in Houston has largely ground to a halt. Major roadways are flooded, some refineries have idled operations, and many schools and office buildings will be closed for this week.

The ultimate economic impact of the storm will not be known for some time. The area is still in rescue phase, and it will take some time to get to assess the damage and begin recovery. In the meantime, here are some initial thoughts and what we are continuing to monitor:

Greater Houston is a major engine of the US economy.
The 2016 GDP of the 26-county region (including Corpus Christi, Victoria, Beaumont) is $558 billion - 35% of Texas GDP and 3% of the US. While Hurricane Katrina was likely more impactful on its community, Harvey hit an economy that is six times larger than southeastern Louisiana.

The city of Houston dominates the regional economy.
Though the affected region is more than 15,000 square miles (twice the size of New Jersey), more than 70% of regional GDP comes from Harris County, and at least ½ of that is the city. Thus while impacts are being felt around the region, how quickly the city itself recovers will determine the broader economic impact to the area, state, and nation.

Short-term lost output could be billions.
The Greater Houston region generates $10.7 billion a week in GDP. If economic activity this week were cut in half from its normal pace that would result in $5.4 billion of lost output. The actual percentage is largely unknowable - some businesses remain open and employees in certain industries can telecommute, and local GDP data is calculated by the government in part based on worker earnings. To the extent that employees still get paid this week whether or not they actually work, the official numbers will understate the output losses. Still, a several billion $ decline in output this week seems plausible.

Recovery will spur growth.
The rebuilding efforts will be a positive force for economic growth as structures, roads, and other infrastructure are rebuilt or repaired and why disasters tend to have just a short-term economic impact. The local construction industry, reeling from more than 8,000 job losses in the past year, will get a much-needed boost.

Things can still get worse.
The situation is not over - the rain continues to fall, and flood waters continue to rise. Beginning to recover is days away. As the rain finally winds down and waters recede the impact of Harvey will depend on how quickly Houston is able to get back up and running. If economic activity is depressed for a longer period then losses will inevitably be higher. Houston has grappled with severe flooding previously so at least this is not a new phenomenon. However, there are scenarios where storm related damage can have longer-term effects.

Energy/export impacts are critical.
Houston is a major downstream energy and export hub, and our colleagues at IHS Markit Energy are closely monitoring developments. Extensive damage to energy, transportation, or port infrastructure would have broad ramifications. More than 30% of US refining capacity lies in the storm track. The Houston metro is also the nation's largest exporter with $97.1 billion in 2015 (6% of the national total). Transportation and energy infrastructure are critical for the metro economy.

Southeast Texas residents have already endured severe personal costs related to Hurricane Harvey. The economic costs, however, may not be as bad. Historically, disaster impacts are temporary as early disruptions are then offset by rebuilding. There is a chance that longer-term issues emerge but for now we need to wait the storm out to assess the damage.

Karl Kuykendall is a Principal Economist in IHS Markit's US Regional Service and is responsible for the economic forecast for Florida and several major oil-producing states.
Posted 30 August 2017



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