Historic storm Harvey will cost tens of billions
Economic toll will be felt nationally, though quick recovery expected
In addition to displacing people and claiming lives, the weather event around the Houston metroplex and along the U.S. gulf coast from the Texas border with Mexico to Louisiana has caused significant damage to the regional housing stock, infrastructure, export terminals in the Houston shipping channel, livestock, agriculture, potable water substructure and supplies. The overall loss of economic activity is enough to probably shave 0.2 percent from gross domestic product (GDP) in the current quarter. However, as rebuilding and reconstruction efforts begin, the economic losses, and more, will be reversed in coming quarters.
Our middle market clients that are part of the agriculture, transportation, construction, housing, insurance and reinsurance ecosystems in the region will certainly be impacted by the disaster. Given the scope of the storm and its aftermath, many of our clients are likely to suffer from a lack of information in the near term and we think it pertinent to provide such information as requested.
Because Hurricane Harvey is likely to be noted as a landmark event that will challenge local and regional capacity during the next few weeks, it is critical middle market businesses remember now is not the time to turn inward and consolidate. Rather, rebuilding and reconstruction efforts should be given priority, as well as a look toward expansioin during what will obviously be a very difficult time.
General loss of productivity, labor, structures and property will likely cause total losses of greater than $45 billion. Direct economic losses are more than $24 billion, though this is contingent upon the median weather forecasting model holding. If the storm sits over Houston for longer than forecast, or again heads out to sea and strikes the major petrochemical infrastructure supporting the U.S. oil and gasoline refining capacity, those losses will be far larger than current estimates.
At this point 25 percent of all oil production in the Gulf Coast has been shut down, which indicates that 20 percent of all oil production in the U.S. is impaired. With respect to gasoline supplies, 40 percent of all oil production dedicated toward refining is currently non-operational and 13 percent of all refining capacity in the Gulf Coast have been knocked off line. Consumers downstream in the region should anticipate significant increases in gasoline prices of anywhere between 20 and 30 percent.
The Houston and Corpus Christi ports are currently not operating, which will impact the greater regional and national economy due to the fact they handle 16 percent of all container traffic. Those two ports, and the other regional ports impacted, account for about 25 percent of U.S. wheat exports, 3 percent of corn and 2 percent of soy shipments. Based on Department of Agriculture data, the region impacted accounts for 60 percent of U.S. soybean exports. Thus, shipments of food and energy, as well as energy production, will be temporarily impaired over the next week or two, followed by overproduction and shipments to meet demand.
In our estimation, rising food and gasoline prices during the next few weeks will be noticeable in the region before moving back to trend. Due to the fact that the Federal Emergency Management Agency, along with agencies across the spectrum, including the Federal Reserve, were able to mobilize in advance of the storm, we anticipate that recovery and reconstruction will be swift. We expect that the loss in economic activity will be completely reversed in the final quarter of this year and the first quarter of 2018. Reconstruction will boost overall economic activity by 0.2 to 0.3 percent, though spread out over that time span. While replacing destroyed property is a difficult, costly and time-consuming process, it will boost overall economic activity.
While first responders are in the field, which is encouraging, the U.S. Congress will have to pass a special supplemental bill to fund these efforts in September. The National Flood Insurance Program needs to be reauthorized by Sept. 30, and recent data imply that there is only $5.3 billion on hand to respond to flood disasters of the type that has occurred during the past few days. The Department of Homeland Security has only $3 billion on hand to address such problems. Since there are only 12 legislative days on the calendar before the Federal Government runs out of money, it is critical that the response to this major disaster along the Gulf Coast receives priority.