Economic Effects: Hurricane Harvey vs. Hurricanes Katrina and Rita

Hurricane Harvey has caused significant flooding and economic disruptions to Houston, the nation’s fifth largest metropolitan statistical area (MSA). Importantly, Houston is home to a large percentage of the nation’s energy production, refining and distribution industry. Houston is also home to a significant amount of chemical production.

Harvey’s full impact certainly won’t be known for some time, but reports on the initial economic impact are starting to trickle out. The following covers a few considerations regarding the economic impact of Harvey and how it compares with Hurricanes Katrina and Rita, which made landfall in late-summer 2005.

Local Population, Employment and Output

Houston’s geographic area, population, employment and level of economic activity are several times larger than New Orleans.

In 2016, the Houston metropolitan statistical area (MSA) had a population of 6.7 million. By contrast, New Orleans’ population was 1.3 million in 2004.

In July, nonfarm payroll employment totaled a little over 3 million in the Houston MSA, which was 2.1 percent of total U.S. payroll employment. In August 2005, nonfarm payroll employment totaled about 620,000 in the New Orleans MSA, or 0.5 percent of total nonfarm payroll employment.

In 2015, output (all industries) in the Houston MSA totaled $471.3 billion, which was 2.9 percent of total U.S. real gross domestic product (GDP). In 2004, total output (all industries) in the New Orleans MSA totaled $75.3 billion, which was 0.5 percent of total U.S. real GDP.¹

Employment Effects in 2005

In September 2005, nonfarm payrolls in New Orleans declined by a little more than 134,000, and then by an additional 50,000 in October 2005. Combined, this comprised 30 percent of New Orleans’ payroll employment.

At the national level, according to real-time estimates, U.S. nonfarm payrolls were reported to have declined by 35,000 in September 2005. U.S. nonfarm payrolls then rose slightly the following month (56,000).

Current vintage estimates now show that U.S. nonfarm payrolls rose by 67,000 in September 2005 and by 84,000 in October, appreciably more than the real-time estimates. Payroll gains over the following six months (November 2005 to April 2006) averaged a little more than 259,000 per month. By contrast, U.S. nonfarm payroll gains averaged 247,000 per month over the first eight months of 2005.

Industrial Production in 2005

As with Katrina and Rita, there could be sizable effects on industrial production estimates for September, given the shut-downs and reduced capacity of refineries and chemical production plants in the Houston area.

In September 2005, the Federal Reserve Board of Governors reported that industrial production rose by 0.1 percent the previous month. The Board noted that: “Hurricane Katrina severely curtailed output in the Gulf Coast region at the end of August; hurricane-related production declines were most evident in oil and gas extraction, industrial chemicals manufacturing, and petroleum refining. Overall, the rate of change in total industrial production in August was reduced by an estimated 0.3 percentage point because of disruptions related to the hurricane.”²

The following month, the Board reported that “industrial production dropped 1.3 percent in September, as Hurricanes Katrina and Rita and a strike at a major aircraft producer significantly reduced output.”³ In addition, the Board reported that:

• The storms reduced the change in total industrial production 0.4 percentage points in August and 1.7 percentage points in September.
• Oil and gas extraction and petroleum refining suffered because of the storms, which contributed importantly to a decrease of 5 percent in production by the energy sector in September.

Current vintage estimates show that industrial production instead rose by 0.2 percent in August but then fell by 1.8 percent in September. Current vintage estimates, unlike those for nonfarm payrolls, indicate a larger decline in U.S. industrial production in September than initial believed.

Potential Losses and Damages

Initial loss estimates from Harvey are a shot in the dark at this point. Still, that has not stopped a few analysts from estimating potential losses and damages.

Moody’s assessed the preliminary property damage estimates between $51 billion and $75 billion. According to the Insurance Information Institute (III), insured losses were $49.8 billion for Katrina and $6.8 billion for Rita.⁴ These losses multiply several times when uninsured losses and other damages are accounted for.

The National Oceanic and Atmospheric Administration’s National Centers for Environmental Information also estimated damages from Hurricanes Katrina and Rita. The total damages and losses stemming from Katrina were estimated to be $160 billion, or about 1 percent of real gross domestic product (GDP).⁵ The damage and loss estimates for Rita were $23.7 billion. Combined, these damage and loss estimates were 1.1 percent of real GDP in 2017.⁶

Potential Effect on the Energy Sector

Although the flooding in the Houston area is still severe and ongoing, an early assessment is that the disruptions to the U.S. energy and chemical production sectors, and the rise retail gasoline prices stemming from Hurricane Harvey, could be larger than those seen during the immediate aftermath of Katrina and Rita.

Estimates for GDP Growth and Employment

Several forecasting firms and financial institutions have begun to estimate the potential affect on U.S. real GDP growth in the third quarter:

• Macroeconomic Advisers believes that third-quarter real GDP growth will be lowered by between 0.3 percentage point and 1.2 percentage points.
• IHS Markit believes that third-quarter real GDP growth will be reduced by 0.5 to 0.6 percentage points.7
• Goldman Sachs estimated that third-quarter real GDP growth will be reduced by 0.2 percentage points.8

Currently, the St. Louis Fed’s Economic News Index is predicting that third-quarter real GDP growth will be 3.7 percent.

According to the Bureau of Labor Statistics, Hurricane Harvey “had no discernable effect on the employment and unemployment data for August.”⁹ However, September employment and unemployment data could be affected, depending on the magnitude of the disruptions to economic activity.

Conclusion

Historical comparisons with Hurricanes Katrina and Rita suggest that the flooding caused by Harvey has the potential to affect the national economy in the very short run. However, estimating the potential economic effects at this stage is fraught with a high level of uncertainty.

While Harvey has the potential to have a noticeable adverse effect on key macroeconomic variables over the next few months, as the region begins to rebuild, this will have the reverse effect.

Notes and References

¹ “U.S. Billion-Dollar Weather and Climate Disasters.” NOAA National Centers for Environmental Information (NCEI) (2017). Dollar figures in this paragraph are expressed in 2009 dollars.

² Dollar figures in this paragraph are expressed in 2017 dollars.

³ “Industrial Production and Capacity Utilization.” Federal Reserve Board of Governors, Sept. 14, 2005.

⁴ Dollar figures in this paragraph are expressed in 2016 dollars.

⁵ “Industrial Production and Capacity Utilization.” Federal Reserve Board of Governors, Sept. 14, 2005.

⁶ Dollar figures in this paragraph are expressed in 2009 dollars.

⁷ Nicklaus, David. “Economy Should Bounce Back Quickly from Hurricane’s Devastation.” St. Louis Post-Dispatch, Sept. 1, 2017.

⁸ Grant, Kinsey. “Here’s How Much Goldman Sachs Thinks Hurricane Harvey Will Hurt U.S. Economy.” TheStreet, Aug. 29, 2017.

⁹ “The Employment Situation – August 2017.” Bureau of Labor Statistics, Sept. 1, 2017.

Additional Resources

• Regional Economist: The Economics of Natural Disasters
• Regional Economist: In the Rubble of Disasters, Politicians Find Economic Incentives
• Page One Economics: Natural Disasters: From Destruction to Recovery