The Economic Cost of Harvey – What We Know Now

Hurricane Harvey has affected lives across the state and nation. The catastrophic storm not only caused significant damage when it made landfall near Corpus Christi, but has also gone down in history as the wettest ever in the continental United States, with devastating flooding in and around Houston. In addition to the tragic loss of life, the destruction of homes and businesses is causing further distress. The human suffering is of paramount importance, and the emotional losses are enormous.

The economy has also clearly been affected. Although the floodwaters have now largely receded, it will be some time before the full extent of the damages can be measured. It is, however, widely recognized that the cost will exceed those of Hurricane Katrina, which had been the costliest storm to date. Time will be required for repair of buildings and infrastructure, and the loss of business activity will be substantial.

The damages associated with Harvey are expected to be higher because of the intensity of the storm and the significantly larger population affected. The region’s critical role in the nation’s energy industry and associated supply chains further increase the effects of the storm. The best available, most recent estimate from AccuWeather indicates the damage caused by Harvey could be as high as $190 billion (property loss and near-term business interruption), making it equal to the cost from Hurricanes Katrina and Sandy combined. This estimate is obviously preliminary and it will be months before a clear picture can be obtained. Texas has requested between $120 billion and $150 billion in Federal aid, an amount which is in keeping with this estimate.

Damages are only a part of the economic implications, however. Any economic stimulus, whether positive or negative, leads to additional responses and multiple rounds of business activity. Business operations have been interrupted, causing lost revenue and profits even beyond the damage to facilities. In many cases, these revenues cannot be recouped. Productivity has also been affected as workers are either absent due to problems with their homes and property or less effective on the job as they deal with those issues. According to calculations from our models, even a 10% drop in productivity for two months in the immediate and directly affected areas could bring a loss of almost $3 billion in gross product.

On the other hand, the act of repairing buildings and infrastructure damaged by wind and water leads to an increase in spending in the construction sector. Suppliers of the goods and services needed to get things back to normal will see additional opportunities due to Harvey. Replacing personal items, vehicles, furniture, and everything else will increase retail activity in the region. These benefits partially offset the overall losses.

In an effort to offer an initial quantification of possible outcomes, we analyzed the potential economic impact of a storm of Harvey’s magnitude on overall economic activity. This analysis reflects a dynamic pattern of recovery typical of property loss and economic responses on past major Gulf Coast storms. We fully accounted for the significance of the refining and port infrastructure in the area and its linkage to overall national activity. We also considered the latest information regarding insurance patterns and typical patterns in Federal aid. In addition, the offsetting effects of the rebuilding process were included. (It’s a complex process, but we have analyzed similar issues related to Gulf Coast storms on numerous occasions.)

We used our US Multi-Regional Impact Assessment System and our econometric models to measure the dynamic effects of Hurricane Harvey on the economy based on the most current estimates of damages and losses. The Impact Assessment System essentially measures the economic responses to a stimulus; in other words, it counts the successive rounds of business activity set off by the stimulus (in this case, the hurricane). The system has been in use for more than 35 years (with updates and refinements) and has been utilized on hundreds of occasions by clients ranging from large government agencies to private sector firms; it has also been peer reviewed.

Based on this model, we estimate that when multiplier effects and the various positive and negative aspects of the economics of the storm are considered, the impact of Hurricane Harvey could include losses to the US economy (which would be observed over an extended period of time) of $145.0 billion in real gross domestic product (constant 2009 dollars), $95.9 billion in real personal income, and more than one million person-years of employment.

The bulk of the impact falls on Texas and Louisiana, with Texas seeing losses of $110.3 billion in real gross state product, $73.0 billion in real personal income, and 771.6 thousand job years when multiplier effects are considered. The losses in Louisiana over time are estimated at $8.7 billion in real gross state product, $5.7 billion in real personal income, and 60.8 thousand job years.

These values represent about 7% of the annual output and income levels of Texas. However, they don’t happen all at once but will instead be felt irregularly over an extended period. The effect on the Texas economy is clearly significant, but even so, it is not likely to derail the state’s long-term pattern of growth for a significant period of time. The underlying forces driving regional growth have not been fundamentally altered. The pace of recovery will depend on many factors, some of them related to public policy responses in a difficult legislative environment. In the end, however, the Gulf Coast economy will resume its expansionary path.