Hurricane Harvey made landfall in Southeast Texas on August 25, 2017 and has brought heavy rains and unprecedented flooding to the area, with some counties expected to receive more than four feet of rain by the time it tapers off. Forecasters expect rains to cease tomorrow morning, but this could still change. Given the ongoing deluge, the situation remains fluid, with the economic impact estimates presented below subject to change as more information becomes available. At this point, early estimates of damage suggest roughly $30bn in property losses, which would make Harvey costlier than Andrew and nearly on par with Ike, but well below that of Sandy and Katrina.
The economic impact of the storm can be divided into two phases. The first, taking place right now, is a slump in economic activity related to the shuttering of refineries, ports, oil rigs, and other places of business. This is going to reduce economic activity during the current quarter and depends on the duration of the stoppage and the breadth of businesses affected. The second phase will be the rebuilding phase, which will add to economic activity as homes and businesses are rebuilt and automobiles and other equipment is replaced.
So far, FEMA has declared major disasters in 19 counties that make up the Houston, Victoria and Corpus Christi MSAs. These economies respectively produce $503bn, $5bn, and $23bn of output annually (as of 2015), for a combined total of $530bn – 2.9% of national output. They are also home to about 30% of the national refining capacity, with a sizeable portion of which is currently offline. Moreover, many of the Gulf of Mexico’s offshore drilling platforms have been shuttered due to the storm.
Given the significance of refining and chemical industries in the region, most of the direct impact will come from the shutdown of refineries, chemical plants, and oil & gas production. Those two industries produce about $60 billion worth of output in the region (and a total of $100bn in Texas as a whole) – or about $1.2bn per week. The size of the oil & gas extraction industry is roughly the same, producing $70bn in the three metros (and $150bn statewide) – or about $1.3bn per week.
A two week shutdown of these industries would result in about $1.25bn drag, assuming the industry is running at quarter-capacity (as it is now) and $5bn if full shutdown of the industry takes place. There could also be downstream impacts in the rest of the state, decreasing output by another $625 million to $2.5bn.
The combined impact is estimated between $1.9bn to $7.5bn, placing it in line with Hurricane Ike in September 2008, when nondurable manufacturing output declined by $8bn.
Excluding the refining, chemical, and oil & gas industries, the remaining economic activity in the three affected metros amounts to roughly $7.5bn per week. A two-week disruption would reduce GDP by $1.9bn if activity is reduced by one-eighth and $7.5bn if economic activity is halved.
Taken together, the combined GDP impact of $3.75bn to $15bn would slow third quarter GDP down by 0.1 and 0.4 percentage points annualized. GDP was tracking 3% prior to Hurricane Harvey’s appearance, suggesting a large cushion remains on overall economic growth during this quarter.
Going forward, clean-up, reconstruction and replacement efforts will provide an economic boost during Q4 and in early-2018. Depending on how staggered activity is, a modest and diminishing economic boost can extend several quarters. A relatively rapid return to full capacity for the refining, chemical, and oil & gas industries in Q4 would produce a sizeable economic boost of 0.1 to 0.4 percentage points, while activity in the first half of 2018 may see a more muted lift.
As far as job losses, these are largely expected to be temporary layoffs that will show up in the weekly initial claims data. The impact on nonfarm payroll numbers will depend on whether the shutdowns extend to the labor force reference week, which includes the 12th of the month. Since Harvey made landfall nearly two weeks after August 12th, there will be no impact on August payrolls in this Friday’s employment report. Should layoffs extend into the September reference week, past experiences suggest that Harvey could result in about 20,000 to 50,000 draw down to nonfarm payrolls – something between the impact of Ike on Houston (24,800) and Sandy on New York (45,300).
Given the reduction in refining capacity, the shutdowns are causing gasoline inventories to dwindle and prices to increase, while the opposite has happened to crude oil – a market already weighed down by oversupply. The higher gas prices may reduce consumption spending nationwide during Q3, but this effect is unlikely to be significant unless prices surge.
In addition to the GDP and payroll impacts, other economic indicators including net exports and industrial production should show some weakness in the coming month or two given the importance of the region as an energy and export hub. Still, we don’t expect these to impact the conduct of monetary policy with the Federal Reserve to judge the weakness as temporary. In fact, we don’t expect the Fed to raise rates again until December, when economic data will already be largely free of the transitory effects of Harvey.