HOT TOPIC: After the Storms: The Economic Impact of Harvey and Irma
As Texas and Florida recover from the devastation of Hurricanes Harvey and Irma, economists and industry experts have begun to assess the economic impact of the storms on a local and national level. It may take years for the effects to become clear, and the loss of life and human suffering are beyond calculation. But preliminary data may help you understand the costs of the disasters as a consumer and taxpayer.
Property and Productivity
In mid September, Moody’s Analytics estimated the combined cost of property damage — including homes, furnishings, vehicles, businesses, and infrastructure — at $150–200 billion, with an additional $20–30 billion in lost economic output, similar to the cost of Hurricane Katrina.1 These estimates focus on Texas and Florida and do not include damage in other states or U.S. Caribbean territories. The fact that the storms hit two of the nation’s economic powerhouses magnifies the potential impact. Texas is the nation’s second largest state economy, and Florida is fourth. Together, they contribute 14% of U.S. gross domestic product (GDP).2
Much of the property damage will be covered by private insurers, the National Flood Insurance Program, the Federal Emergency Management Administration (FEMA), and other federal agencies. The speed of recovery depends in large part on how quickly these funds flow to businesses, homeowners, and state governments. However, flood insurance typically has high deductibles and payment caps, and many businesses and homeowners did not have coverage; some might not recover. Public infrastructure may take many years to rebuild or redesign.3
The loss of economic output is expected to cut into the third-quarter growth rate of U.S. GDP by 0.4 to 0.8 percentage points.4 Expectations for the quarter had been high, but the storms, combined with other factors, have changed the picture. The GDP forecast of the Federal Reserve Bank of Atlanta dropped from a growth rate of 4.0% on August 3 to 2.2% on September 15.5
On the positive side, GDP may grow more quickly in the fourth quarter of 2017 and early 2018 as funding flows into the affected areas and reconstruction begins.6
Gasoline, Tourism, and Citrus
Hurricane Harvey shut down at least 25% of the nation’s oil refining capacity, stopping or reducing production at 20 Texas refineries. A week later, Hurricane Irma forced mass evacuations in Florida, increasing demand just as supply was restricted.7–8 Prices at the pump spiked, with the national average reaching $2.67 per gallon, a level last seen in August 2015.9
In mid September, 12% of national refining capacity remained offline, but gas prices had stabilized, aided by a record draw of 8.4 billion barrels from the nation’s gasoline reserves. Even so, gas prices may remain elevated for some time, hitting consumers in the pocketbook while helping the refining industry to recover.10–11
Hurricane Irma damaged businesses and infrastructure throughout Florida, but two key industries — tourism and agriculture — suffered a direct hit. While big theme parks escaped serious damage, smaller operations in the south and the Florida Keys face a difficult recovery.12 The citrus industry saw hopes for a successful harvest blown away by Irma, which destroyed 50% to 70% of the crop in south Florida. Consumers can expect higher prices for orange juice this winter.13
Cars and Construction
Roughly 500,000 to 1 million cars and trucks were destroyed or damaged by the two storms. This could increase new car sales and raise used car prices in the affected areas and surrounding regions, a boon to automakers and dealers but a challenge for consumers.14 Buyers should also beware of flood-damaged cars.
The construction industry typically thrives after a disaster, but contractors are struggling to find skilled labor, which may slow the pace of recovery. It’s estimated that Houston alone will require 10,000 to 20,000 construction workers over the next 12 months.15
Since Hurricane Katrina in 2005, the federal government has covered about 62% of hurricane relief costs through the FEMA Disaster Relief Fund, the National Flood Insurance Program (NFIP), and other federal agencies.16 The price tag for federal aid will not be known for years, but there is no question that the one-two punch of Harvey and Irma — followed by Hurricane Maria — will strain already precarious programs.
The NFIP is $25 billion in debt due to massive expenditures for Hurricanes Katrina and Sandy, and the FEMA Disaster Relief Fund was down to just $1 billion on September 5.17–18 Three days later, an emergency relief bill provided $7.4 billion each to FEMA and the Community Development Block Grant program, and $450 million to the Small Business Administration — only the beginning of federal relief funds.19 The bill extended the NFIP through December 8 but did not provide additional funding.20
As Texans and Floridians rebuild, it’s clear that the hurricanes will not only change the lives of those directly affected but will also have a broader, if temporary, impact on consumers and the U.S. economy. The larger question is whether these disasters will lead to fundamental changes in areas such as building codes, zoning regulations, flood insurance, and emergency funding.