Hurricane Irma battered the coast of Florida just days after Hurricane Harvey ravaged the Gulf coast, taking lives, flooding homes and tearing up infrastructure. Though Irma's wrath inflicted less damage than had been expected, there has been significant damage to property and industry. Texas was the second largest state contributor to the U.S. GDP after California in the first quarter of this year, and devastation due to Harvey will have far reaching economic consequences for both its government and private investors.
The initial impact of Harvey has already begun to show up in economic data. The Bureau of Labor Statistics revealed U.S. jobless claims data that jumped to a near two year high for the week ending September 2. With Irma following close at its heels, will this hurricane season have a palpable negative impact on the U.S. economy? New York Federal Reserve President William Dudley thinks it will be quite the opposite.
"Those effects tend to be pretty transitory," Dudley told CNBC in an interview last week. "The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms."
The Macro Economic Impact
Houston and its surrounding metropolitan area is an important business center. According to the Bureau of Economic Analysis (BEA), in 2015, the Houston- The Woodlands- Sugar Land area was the fourth largest metro area in terms of Gross Domestic Product (GDP), accounting for nearly $500 billion worth of output. That made it responsible for nearly 3% of the country’s GDP that year.
The Financial Times reported that researchers from JP Morgan pegged the physical damage from Harvey between $10-$20 billion and the GDP impact at 0.1 percentage point. Those from Goldman Sachs were reported to estimate the economic impact at 0.2 percentage point of the GDP.
But understanding the GDP impact is complex. There are both short-term and long-term issues to consider. While the devastation will impair business and economic activity in addition to the losses in the short term, over the longer term repair and reconstruction could absorb some of the negative impact.
That was true for disasters like Katrina and Harvey is unlikely to buck that trend.
“To be sure some of the negative hit to growth will likely be offset by a boost to construction spending as rebuilding efforts get under way. Hence, this unfortunate event will not likely affect the overall trajectory of the economy or monetary policy,” said Deutsche Bank economist Brett Ryan, as quoted by Yahoo Finance.
Industry Specific Impact
Texas is the largest contributor to the U.S. oil and gas industry. Many of the nation's largest refineries are located in the state, and Texas has drilling sites both inland and offshore. As hurricane Harvey lashed the state, many facilities were forced to shut down and many others forced to operate at reduced capacities.
According to the U.S. Department of Energy (DOE), as of September 10, 5.8% of U.S. oil refining capacity remains out of commission in the Gulf Coast region. Six refineries have restarted operations as compared to August 30 when nearly 18% of oil production and 19% of natural gas production in the Gulf of Mexico (offshore) were shut because of the inclement weather. At that time a 100 manned platforms and 5 rigs were evacuated while onshore production also suffered in the range of 300,000 -500,000 barrels a day.
Ten petroleum refineries including the nation’s largest owned by Motiva in Port Arthur, Texas were forced to shut down at the end of August. These refineries had a combined refining capacity of over 3 million barrels a day accounting for 31.7% of total Gulf Coast refining capacity and 16.6% of total U.S. production, according to the DOE.
According to S&P Global Platts, other facilities forced to shutter operations include Exxon Mobil’s (XOM) Baytown and Beaumont Refineries, Valero Energy Corp.’s (VLO) Corpus Christi and Three Rivers plants, Petrobras’ Pasadena, Tx unit and Shell’s Deer Park, Tx refinery.
Image courtsey: U.S. Energy Information Administration
In its latest update, the DOE said that some refineries had begun to restart their operations but it could take up to several weeks for them to return to their pre-hurricane operation levels depending on the extent of damage.
Shipping & Transportation
Texas is also home to some of the country’s busiest and largest ports by cargo tonnage. In 2015, Texas ports handled 563 million tons of cargo, nearly 22% of all U.S. port tonnage. Houston (2nd), Beaumont (5th), Corpus Christi (6th) and Texas City (15th) were ranked among the Top 50 U.S. ports by the U.S. Army Corps of Engineers. Heavy rain crippled the ability of these ports to allow ships to offload their cargo. The DOE report revealed that by August 28, 2017, 22 oil tankers carrying more than 15.3 million barrels of crude oil were unable to offload it due to port closures.
Flooding has also disrupted freight transport through road and rail. This could translate into delays and more importantly higher truckload rates per mile.
As the extent of damage that hurricane Harvey has left in its wake starts becoming clearer, estimates of insurance costs have begun to emerge. While Insurance Council of Texas spokesperson Mark Hanna pegs the insurance loss figures close to the $12 billion seen for Hurricane Ike in 2008, JP Morgan analyst Sarah DeWitt estimates the figure to be closer to low single digit billions. (See also: Hurricane Harvey Could Cause Havoc for Insurance Companies.)
According a Marketwatch report, an analysis conducted by research firm CreditSights puts State Farm at the top of the list of insurers exposed to risks from Harvey based on direct premiums of homeowner’s insurance policies written in 2016 for Texas, followed by All Corp. (ALL) , Farmers Insurance, USAA and Liberty Mutual Insurance. CAN leads the pack for commercial insurance premiums.
All State stock was down over 3% August 24 through August 30. Historically however, it is the reinsurance companies that typically bear the brunt as insurance companies pass on their losses.
Personal Finance Impact
For people such natural disasters are not just a harrowing physical and psychological ordeal but can also be financially devastating. Research conducted by University of Illinois College of Law professor Robert Lawless suggests that hurricanes have a direct impact on personal bankruptcies. In fact, over the course of three years since the hurricane, states that have seen landfalls have also seen bankruptcy filings increase by over 45% on average.
The hit on personal finances is harder for people without adequate insurance and that could be a big factor in case of hurricane Harvey. As of June 20, 2016 in Harris County, the region that includes Houston and was the hardest hit, only 15% of homes had flood insurance policies according to Federal Emergency Management Agency (FEMA) data. The number of flood insurance policies in place has been on a decline in four out of the past five years.
Harvey will pinch the pocketbooks of people outside the southwest when they stop to refill their car gas tanks. A drop in supply has ensured that gas prices are on their way up. How long this trend lasts will depend upon how quickly the damage to refineries can be assessed and operations resumed.
Federal Government Impact
Not only does inadequate flood insurance hurt people whose homes the hurricane has destroyed, it also puts pressure on the National Flood Insurance Program. The program makes loss payments to those that do not have flood insurance and often borrows from the Treasury Department to meet its claims obligations.
However, the U.S. Government Accountability Office (GAO) had earlier this year classified the program as high risk as it feels that the program will not be able to generate revenue in order to repay what it has borrowed.
“As of March 2016, FEMA owed the Treasury $23 billion, up from $20 billion as of November 2012. FEMA made a $1 billion principal repayment at the end of December 2014—its first such payment since 2010,” said the GAO.
The stock markets have barely reacted to the Harvey news and seemed more worried about North Korea’s missile tests. As far as individual stocks are concerned, oil and gas stocks like Exxon and Royal Dutch Shell (RDS.A) saw some movement but have remained largely flat between August 24 and August 30 while shares of Valero Energy have increased close to 1.5% potentially on the back of higher gasoline prices.
CNBC's Jim Cramer points out that looking back, insurance stocks may take a hit over the short term but over the medium term as companies pass on the costs to reinsurers and seek to rates, such disasters could spell significant upside. Within three months of Hurricane Katrina in 2005, stocks such as Progressive Corp. (PGR) jumped 27% while Chubb Limited (CB) rose nearly 25%.
Despite the production shutdown and the delay in import arrivals, crude oil prices have not rallied. Some analysts believe it could be an opportunity for shale producers to pounce.
“Although crude is affected in that area it also puts the focus more on being able to produce the oil through the shale. Shale is a big effect. That’s one reason why crude isn’t rallying as much,” said Howard Marella, President, Icon Alternatives, a futures investing firm. “There’s an alternative to that drilling, we could get crude through shale now. The shale production could increase considerably now which would give us a longer term outlook on how well we can much we can put out through shale per day.”