The Effects of Hurricane Harvey on the National Economy

The devastation of Hurricane Harvey on Houston, the 4th largest city in the United States, has been predicted to negatively impact national activity and employment, according to Chad Moutray, chief economist for the National Association of Manufacturers.

The damaging effects of Hurricane Harvey left physical scars on Texas, and to an extent, a few bruises to the national economy. While some can argue that huge widespread events actually spur economic re-structuring, the Federal Reserve reported that industrial production decreased by nearly 1% In August from July. To put this number to scale—this decline was akin to that during the 2008 recession. This decrease in production was attributed to less oil drilling and petroleum refining.

Due to a decreased supply of oil, gas prices rose, and as a result, consumers have less money in their pockets to spend on other things. This accounts for the “C” component in the GDP equation.

At a rudimentary level, economists expect overall output to decrease in short run because of storm-related job losses, but note that it will ultimately increase in future quarters when jobs and structure start to come back. In the long run, however, the Harvey won’t drastically affect the big economic indicators: GDP, unemployment, and inflation.

The Wall Street Journal forecasted that Hurricane Harvey will “reduce the pace of job gains by about 27,000 jobs a month” in Q3. By Q1 of 2018, forecasters predict a boost of 13,000 jobs. Economists also predict GDP will fall by 0.3% in the third quarter.

To add salt to the wound, most homeowners and business-owners did not have flooding insurance, which additionally decreases their ability to spend and invest. It’s almost analogous to the effects of a stock market crash, says Constance Hunter, chief economist at KPMG.

Although the commerce department could not completely isolate the effects of Harvey on brick and mortar retailers, the weeks following the storm saw a mix of sales drops and increases. Necessity goods sales increased, including home furnishing supplies and grocery stores, while sales of non-necessity goods decreased. For instance, gas-station sales rose 2.5% in a month, due to higher oil prices. Internet sales fell a percent, the largest decline since Q2 2014. Another uptick to the equation is a 0.2% increase in auto sales, due to the loss of automobiles (a necessary good) from the storm.

Overall, a small dip in productivity will be seen for a quarter, due to rising oil prices, lost assets, and decreased consumer spending. Though only a short-term scale, consumer spending, which accounts for two-thirds of GDP, will still have a profound effect on the surrounding economic and regional locus.

Sources:

https://www.wsj.com/articles/u-s-retail-sales-fell-in-august-1505478885

https://www.wsj.com/articles/u-s-industrial-production-fell-in-august-as-hurricane-harvey-hit-gulf-coast-1505481802

https://www.wsj.com/articles/how-hurricane-harvey-will-ripple-through-the-u-s-economy-1504792802

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