AUGUST 30, 2017 - As of this writing, the damage caused by Hurricane Harvey (and the deluge of rain that followed) has been estimated at $50-75 billion. This would make Harvey one of the costliest storms ever to hit the U.S., exceeded only by Katrina’s $108 billion damage and Sandy’s $75 billion. Recent estimates suggest that the cost of Harvey could even exceed that of Sandy, making it the second most costly natural disaster of the past 30 years. Moody’s Analytics estimates that $30-40 billion of this total will be for damage to homes and vehicles, $10-15 billion for businesses such as stores, offices, and industrial space, and $5-10 billion for infrastructure. The toll in terms of human suffering and loss is, of course, incalculable.
The economic impact of the storm and its effect on construction starts can be broken into two distinct phases, short-term and long-term. The short-term effects are already obvious. Economic activity, including construction, in these areas has stopped and will be at a stand-still for weeks, possibly months. Most energy-related activity in the area has shut down and businesses are closed. In response, unemployment claims in the area will move significantly higher, and the September jobs number for the area is likely to be very weak (the storm happened after the August employment surveys). With refining capacity closed, energy and gasoline prices are likely to move higher. It is far too early to determine the effect of the storm on the nation’s third quarter GDP growth: before the storm it was tracking near 3%, but now is likely to be lower.
The Houston area has borne the brunt of the storm and, as the nation’s fourth most populous city, the economic impact to the region will be notable. As of August 29th, FEMA had declared major disaster areas in 19 counties in the Houston, Victoria, and Corpus Christi metro areas. Construction starts in these three metro areas reached a massive $44.4 billion in 2015 as a number of large, multi-billion-dollar LNG facilities and petrochemical plants broke ground. Total starts fell 42% in 2016 to $25.5 billion, still a historically high level of activity for this area (see chart).
In the first seven months of this year, construction starts in the affected metro areas have been mixed. Year-to-date, residential starts were 1% lower than a year earlier and nonbuilding starts were down 56% due to further sharp declines in the energy sector. By contrast, nonresidential building starts were the silver lining to this otherwise bleak picture: starts gained 6% through the first seven months of this year compared to the same period last year.
According to the third-quarter forecast from Dodge Data & Analytics (with historical data through the second quarter), total construction starts in these metro areas were expected to remain flat in 2017 for the year as a whole, as gains in residential and nonresidential buildings offset a decline in nonbuilding starts. The upcoming third quarter forecast for the region in 2017 will likely be lower reflecting the initial aftermath of the storm, where the focus will be on cleanup and damage assessment, rather than rebuilding. Given the breadth of this storm, this stage could take many months.
Once it begins, rebuilding in residential markets will take time. As much as 70% of storm damage was to areas that did not require flood insurance, and while uninsured homeowners will likely receive some federal assistance, those funds will be slow to materialize. Families who evacuated the area could also be slow to return, further delaying residential rebuilding. The population of New Orleans, for example, has yet to return to its pre-Katrina level. While Houston has a much stronger job base than New Orleans, the fact highlights the difficulty in rebuilding homes when so much infrastructure has been destroyed. Moreover, the construction response in the residential sector will be difficult to measure since much of the construction associated with the recovery will be directed to renovations for single family housing, which are not included in the Dodge statistical database and are no longer available from the U.S. Census Bureau.
The reconstruction of commercial buildings will be hampered by the fact that the region’s office, warehouse, and retail vacancy rates were elevated prior to the storm following three years of low oil prices. A more rapid response is likely for the rebuilding of institutional facilities such as hospitals/medical offices, schools, and public administrative buildings. Manufacturing reconstruction, especially in the petrochemical industry, will also be quick to materialize as companies move to restart the production that is so central to keeping the U.S. economy moving forward.
A concerted and rapid rebuilding effort will also be directed towards public works. Public works construction in the area hovered near $5 billion over much of the last five years, but had jumped 13% in the first seven months of 2017. Given the effects of flooding on the area’s infrastructure, levels of activity will be historically high in this region during the years to come. The actual timing of activity, however, will depend largely on the pace of federal funding for disaster relief. The Congressional Budget Office found that while virtually all of the $51 billion of federal money contained in the Superstorm Sandy relief package was spent on storm-related reconstruction, it was distributed very slowly. Dodge is still reporting project starts for Sandy-related reconstruction.
Repairing the damage caused by this storm will be years in the making. In the weeks and months to come, Dodge Data & Analytics will be assessing the effect of this reconstruction on the forecast for the region and the nation. The next local construction forecast will be released in mid-November and further updates will be provided as they become available.
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Photo credit: Business Insider
By Richard Branch, Senior Economist, Dodge Data & Analytics
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