How does Hurricane Harvey impact economic growth in Texas?

The Houston area economy is making strides following the devastation brought by Harvey but conditions are far from back to normal. The impacted area in Southeast Texas comprises 35% of Texas GDP (nearly 3% of US GDP) and is a prominent engine for the state economy. The disruptions incurred will have a sizable impact on near-term growth, strain homeowners and small businesses, and put pressure on the local housing market:

• Harvey will slash Texas Q3 GDP. Real GDP in Texas will decline by 1.4% in the third quarter of 2017, a sizable downgrade from the projected 4.6% growth during our August forecast (released before the storm). The downward adjustment was not entirely due to Harvey, but it was the prominent influence. The 26-county Greater Houston region (including Corpus Christi, Victoria, Beaumont) generates $10.7 billion a week in GDP. Harvey brought massive economic disruptions. The economy has been running below potential since, leading to billions in lost output. The initial claims for unemployment insurance data are showing Harvey's impact with claims in Texas jumping to 63,788 in the week ending in September 2nd from 12,105 in the week prior.
• Economic growth in Texas will accelerate over late 2017 and into 2018. Houston's airports are running, most key road and railways are open, all the major Gulf ports are operating (some with restrictions), refining and chemical industries are increasing capacity. From an infrastructure and operational standpoint, Houston avoided catastrophic damage. The main levers of the Houston economy are coming back online. The negative hit to Texas GDP will be contained to this quarter. The recovery and rebuilding efforts will be a notable stimulus to growth during the fourth quarter of 2017 and into the first two quarters of 2018, adding 2.2, 2.0, and 1.4 percentage points to Texas GDP growth, respectively, relative to our August forecast.
• Houston's large and dynamic economy will expedite rebuilding efforts. Economic prosperity can solve a lot of problems. Houston is the fifth-largest metro economy in the US. It is the epicenter for the burgeoning US energy sector and the largest metro exporter in the nation sending out $97.1 billion in 2015 (6% of US total). Its economy is wide-reaching with broad US and global implications. All of this provides a strong incentive and urgency to get the metro running back to full speed as quickly as possible.
• Homeowners will be on the hook for costly repairs. Estimates for damaged homes across the region range from 80,000 to more than 200,000 with only 20% of Houston area homeowners having flood insurance coverage. The Federal Emergency Management Agency (FEMA) will provide support but generally not enough to cover all costs. Grant money a household can receive is capped at $33,300 with the average payout far lower, totaling $7,114 after Hurricane Katrina and $8,016 after Sandy. Meanwhile, the flood insurance program estimates the average flood claim to be around $39,000. There are other federal relief support options including low interest loans. Private charities will also provide relief to some. But the bottom line is that some cash strapped households will find covering repairs difficult if not impossible. This could lead to an uptick in delinquencies in the short-term.
• The residential market was undersupplied before Harvey. The Houston housing market has been tight for the past five plus years. The inventory of homes averaged 3.8 months of supply in July (12-month average) according to the Texas A&M Real Estate Center - a well-supplied market should have around 6 months of inventory. Houston has been a magnet for new migrants with builders unable to keep up with demand. The destruction caused by Harvey will put more pressure on an already tight home market. Fortunately for displaced residents, Houston had a glut of available apartment units ahead of the storm - the rental vacancy rate was 8.7% in the second quarter, the 17th highest of the 75 metros where Census produces estimates.
• Many small businesses will struggle. Small businesses have a lot to contend with following a disaster: navigating insurance coverage, disruptions to customers and suppliers, and the aftermath of residents that tighten up their wallets to deal with costly repairs. There are low interest loans, grants, and charitable donations available for additional aid but it is not always enough. Nearly 40% of small businesses do not reopen following disasters according to FEMA. Failing businesses do open opportunities for new ones to move in. Houston remains a business friendly city serving a large and diverse population, which is attractive to entrepreneurs. But again, there will be short-term disruptions.
• Some small businesses will thrive. The disaster recovery will create a windfall for local construction companies. Hotels and apartment owners will get a temporary boost from displaced residents and relief workers. Businesses that are able to remain open will suddenly see less competition, at least in the near-term.
• The remnants of Harvey could remain for years. The impact on Houston and its residents will remain long after economic conditions are back to normal. The city could redefine flood plains, flood insurance rates could rise, there could be wider construction of raised housing units, and land values in higher elevation areas could increase while values in flood prone areas decline. These are a few changes Harvey could bring that may not be evident in the economic data.

Karl Kuykendall is a Principal Economist in IHS Markit's US Regional Service
Posted 14 September 2017