Economic and Fiscal Impact of Hurricane Harvey

The slowly unfolding tragedy in southeast Texas is a personal, emotional experience for millions of people. Eventually, however, Hurricane Harvey and its aftermath will also be counted in terms of the material and economic losses for households, businesses and governments. Beyond the immediate effect, there will be long-term fiscal consequences for many.How big might the impact be on local community economies and the local governments that serve them?

There are problems with trying to measure the economic impact of a natural disaster this early, as it is still happening. First, historically, the early estimates of damage and economic impact in natural disasters tend to be higher than the final tally. Several factors contribute to this. Early estimates are made without the benefit of comprehensive data. Many economic statistics are only calculated monthly, quarterly or even less frequently. Structure damage is often over estimated. A building may appear to be a total loss, but often turns out to be salvageable with some repairs. There are also political motives, where local and state officials feel the need to present the worst possible case to maximize federal relief funding. Emotional trauma and media hype can also contribute to worst-case estimates. It is not easy to maintain objectivity in the face of life and death circumstances and continuous media exposure of surreal disaster footage.

We are already seeing preliminary estimates for Harvey in the tens of billions of dollars. Chuck Watson with Enki Holdings threw out a $30 billion number. Kevin Simmons at Austin College speculated that it could exceed Katrina’s economic tally – over $100 billion. Since the storm isn’t over, and flooding will continue, these may prove to be accurate. As the storm moves east into Louisiana, the damages will increase. How can we begin to consider what the total might be. When work for state and local governments, it was helpful to point out to elected officials what the daily scale of economic activity in the community was. A day’s worth of economic output for a city or state is a good metric to compare against major economic events, good or bad.

There are five Texas metropolitan areas in the impact zone of Harvey. These include: Beaumont – Port Arthur, Bryan-College Station, Corpus Christi, Houston-The Woodlands-Sugar Land and Victoria. These five metropolitan areas are home to almost 8 million people (2016 estimates.) Their economic output, according to the latest data from 2015, is about $565 billion. They represent a bigger economy than Argentina, or twice the size of Hong Kong. A simple average daily economic output for those metro areas comes to $1.5 billion. This is ongoing business based on the productive activity of people in the region, using their training and talents and the physical assets that make it possible. These assets include tools, buildings and infrastructure. If everything comes to a complete standstill, then there is a maximum loss of $1.5 billion each day. It is impossible to tell from news reports exactly how much business interruption there has been. The Houston Chronicle has started reporting on restaurants and grocery stores that were reopening as of Tuesday. The daily lost economic output will not be the greatest blow to the economy.

The more important financial damages will be in losses of buildings,  infrastructure, equipment and inventories. A third major impact is from loss of human life. Mercifully, there seems to be relatively few deaths so far. Each of these is a personal tragedy. Beyond that tragedy, each death also means the loss of that person’s talents and productivity forever. This will impact the prospects of the families and businesses involved.

It can be helpful to consider an analogy in thinking about the impact of Harvey. The 2016 Louisiana floods centered on Baton Rouge are a smaller scale event but were similar to what we are seeing today. In that unnamed storm, areas in Louisiana saw over twenty 20 inches of rain in a few days. That storm dumped three times the amount of water on Louisiana as did Hurricane Katrina. In 2016, a LSU study for the State of Louisiana estimated that at the peak, about 20 percent of Louisiana businesses were disrupted, or about 19,000. Almost 5,000 experienced actual flooding. Two weeks after the peak of that flood, there were still an estimated 5,000 experiencing disruptions. The Louisiana flooding hit an economy only about 1/5th as big as our affected Texas metros. Still, the LSU study proposed a $8.7 total economic impact, excluding lost public infrastructure. The study, done shortly after the floods, does not appear to have been revised. It was still being cited in federal disaster relief reports as late as earlier this month. A storm delivering twice the flooding on an economy five times larger could equally rival the impact of Hurricane Katrina. This is not an estimate, but this simple framework is a way of starting to sort through the many conflicting reports we will see in the coming days.

The larger economic impact numbers include potential hits to local governments. There are short-term and long-term impacts. Cities, which already have strained finances must increase their public safety operations in and immediately following a disaster. Clean up and waste disposal during recovery adds additional costs. Long-term, local governments will need to rebuild streets, water systems, traffic signals and replace vehicles. There can also be serious losses to public buildings like libraries, fire stations and schools. A lane mile of road can cost $1.5 million to build. Traffic signals for a four-way intersection can run $300,000. These costs quickly add up. The City of Houston alone, has a massive inventory of physical assets. According to the city’s latest comprehensive annual financial report, the city owned $8.6 billion in buildings, improvements and equipment, and listed $16.7 billion in infrastructure assets. These figures are reported before depreciation. Some damaged or lost assets will be replaced from the city’s annual capital budget. Given the magnitude of the expected losses, much of this will need to be paid for from new debt. That will put pressure on day to day operations for years.

Harvey also comes at a crucial time on the local fiscal calendar. Most cities in the state have a fiscal year that begins October 1. Houston is one of the few that do not, having a July start to their budget year. Elsewhere, city managers and budget directors have already completed their proposed budgets and identified the property tax rates they will need to meet those budget responsibilities. City Councils are poised to adopt those budgets in coming weeks. Hundreds of cities, school districts and counties will be dealing with recovery from Harvey, and scrambling to adjust those budgets. This can also cause misallocations and waste. Quick, chaotic budgeting is seldom wise budgeting.

We will follow developments as this historic disaster unfolds. Though it is almost impossible to maintain objectivity in the face of suffering on this scale, we hope to continue bringing our fiscal sustainability perspective to the situation in Texas and Louisiana in the coming week and months. Our prayers and thoughts go to those living with Harvey’s effects. For official information and ways to help those in need, see the State of Texas emergency website here.

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