The third major hurricane in two months hit the United States in late September, this time impacting Puerto Rico and surrounding islands. A category 4 storm at landfall, Hurricane Maria hit south of Yabucoa Harbor in Puerto Rico on September 20, with sustained winds of 155 miles per hour. The storm caused the electrical infrastructure of the entire island to be destroyed, and some estimates put the restoration of power on the island on a six to eight or even 10-month time frame. Hurricane Maria also extensively damaged drinking water supply systems, hospitals, schools, and cell service infrastructure.
The storm’s impact will go beyond the human suffering and devastation. The economic effects of the destruction in the years to come will continue to show Maria’s magnitude. Recent preliminary damages estimates indicate property and short-term losses as high as $95 billion.
Damages are only a part of the economic implications of these storms. 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. 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 Maria. Replacing personal items, vehicles, furniture, and everything else will increase retail activity. These benefits partially offset the overall losses, though these positive effects will be muted due to challenges with getting needed supplies to the area, financial difficulties, and other problems.
In order to offer an early perspective on potential losses, we used our US Multi-Regional Impact Assessment System and our econometric models to measure the dynamic effects of Hurricane Maria on the economy based on the most current preliminary 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 initial activity (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. In this analysis, we have translated the estimated property losses into likely long-term losses in business activity (including the offsetting net effects of the subsequent rebuilding activity) using techniques previously developed by Dr. M. Ray Perryman, founder and president of the firm, and used in the assessment of prior storms (including Hurricanes Ike, Rita, Katrina, Harvey, and Irma).
Based on this model and current property damage estimates, when multiplier effects and the various positive and negative aspects of the economics of the storm are considered, the net impact of Hurricane Maria could include losses to Puerto Rico and other US territories (which would be observed over an extended period of time) of $47.5 billion in real gross domestic product (constant 2009 dollars), $31.4 billion in real personal income, and about 332.0 thousand person-years of employment.
The combined impact of Hurricanes Harvey, Irma, and Mariaon the US economy over the next several years is estimated to be a $299.8 billion reduction in real gross domestic product, $198.4 billion in lost real personal income, and a loss of 2.1 million job years of employment (including multiplier effects).
Given the industrial composition and recent performance of Texas, Louisiana, and Florida, we expect full recovery from these losses over time and a pattern of expansion in the future. For Puerto Rico, however, the devastation of key infrastructure such as the power grid will slow the return to normal, and the negative effects on the economy will linger for an extended period of time.