This year two large natural disasters, Hurricanes Harvey and Irma, have not only devastated thousands of lives and destroyed billions of dollars’ worth of property, they may have also done long-term damage to the competitiveness of two of the most economically important states in the U.S. – Texas and Florida. According to Diane Swonk of DS Economics, the two storms and their impact on these two states could slow overall U.S. economic growth by a full percentage point this quarter. This would indicate a growth of 1.8% compared to projections of 2.8% growth prior to the storm.
According to a preliminary estimate from Moody’s Analytics, Hurricane Harvey and Irma could cause between $150 billion and $200 billion in damages to Texas and Florida, comparable to the costs from Hurricane Katrina in New Orleans in 2005.
AccuWeather’s President, Joel Myers, stated that his firm estimates a total of $290 billion in damages ($100 billion from Irma and $190 billion from Harvey). These economic costs arise from disruptions to businesses, increased rates of unemployment, damage to infrastructure, property damage, higher fuel prices, and crop losses.
However, taking a positive spin on this, Mark Zandi, chief economist at Moody’s Analytics, said rebuilding from the back-to-back storms will boost the U.S. economy in the fourth quarter of 2017 and into 2018. Moody’s says that a critical factor towards determining the impact on the economy is seeing how much insurance money and government aid flows into the impacted areas and the speed in which it gets there. Additionally, the timing and magnitude of the rebuilding boost to economic growth will depend upon labor availability in the two states. Further corroborating this position, the Federal Reserve projects that the hurricanes will have little long-lasting economic effect. New York Fed President William Dudley suggest that the ultimate impact of the storms could be a modest boost for the economy due to rebuilding activity. In its quarterly economic projects, the Fed raised its GDP outlook for 2017 from 2.1% to 2.2% and sees the unemployment rate stabilizing at 4.1% in 2018 and 2019, down from the 4.2% projection in September 2017.
Hurricane Harvey had a devastating impact on Texas in August 2017. According to the Commerce Department’s Bureau of Economic Analysis, Texas accounted for almost 8% of total U.S. economic output in 2016 with a gross domestic product (GDP) of $1.6 trillion dollars. One of the major cities hit the hardest, Houston, is America’s fourth-largest city – even those not directly affected by the storm are still facing huge daily disruptions, such as road closures which are increasing commutes substantially and influencing productivity.
There are other more direct potential costs as well. Houston’s mayor recently said he would propose an emergency 8.9% increase on the city’s property tax rate to deal with growing storm-related costs.
In other hard-hit cities such as Beaumont, Port Arthur, and Corpus Christi, there are many citizens temporarily out of work. The state’s most crucial industries like energy and petrochemical are still trying to get back to full strength. During the storm, 20 Texas oil refineries were closed or shut down, reducing nearly one quarter of total U.S. refining capacity. The state had already been struggling to maintain its competitive edge due to failing energy prices, and the state economy had just started to come back as oil prices stabilized when Harvey made landfall in Texas on August 25th, 2017.
Compared to Texas, Florida’s economy is smaller but is range of industries, including tourism, ports, business services and healthcare, magnifies the impact from Hurricane Irma. Recently, Florida’s economy had climbed to second place overall due to solid growth, strong state finances, and the fifth best year-over-year job growth in the country. After Hurricane Irma, threatening the economy is the hit to tourism due to disruptions and lost predictivity and losses to the state’s citrus crop. The hurricane caused losses of 50 to 70% of the state’s citrus crops in parts of South Florida, according to the Florida Fruit and Vegetable Association. In 2016, the value from Florida citrus was $1 billion, and the state ranks second in orange juice production to Brazil.
Catastrophe-modeling firm Karen Clark & Co. calculated that insured losses from Irma would be $18 billion. However, since the state’s economy is in solid shape, the Board of Economic Advisers expects it to be a setback but not sufficient enough to knock the state of the its growth trend.
Hurricane Maria’s Impact on Puerto Rico
Hurricane Maria hit Puerto Rico in September 2017 as a Category storm, causing potential devastating economic damage. The island was already in a years-long debt debacle and had a struggling economy. The government owes $74 billion to bondholders and an additional $50 billion in pension obligations to teachers and other government employees. In May 2017, it filed for the largest municipal bankruptcy in U.S. history.
Another long-term problem is that many residents are moving from the island to the mainland United States, leaving a skills shortage to handle rebuilding and development. The territory’s population was down to 3.4 million residents in 2016, compared to 3.8 million in 2004. According to the Pew Research Center, high unemployment rates (10.1% in August 2017) in Puerto Rico and better job opportunities in the mainland U.S. have prompted residents to move to Florida and Texas.
The hurricane had a massive impact on the island, and is being regarded as the strongest storm to hit Puerto Rico in nearly 90 years. Wind and water from the storm drowned nearly all power and communications, and Governor Ricardo Rossello says that the electrical grid was so severely hit that it could be months before electricity is restored to all customers.
Enki Research, a disaster modeler, estimates damage to the island at $30 billion, with $20 billion in direct physical damage and $10 billion in economic impact. Especially concerning to the territory’s economy is the hit to the manufacturing sector and to travel and tourism.
Puerto Rico has exhausted its financial resources. That will leave them strictly with the options of the federal government to provide aid and restore infrastructure. That’s the only way Puerto Rico will be able to pull themselves together.” ~Hernando Montero Salazar, Director of Credit Analysis at Stoever Glass & Co.