Given the size and geography of the US, it is vulnerable to extreme climatic events including snowstorms, intense drought and, violent hurricanes and tropical storms, most recently Harvey, all which can cause significant damage and loss of life and thus result in notable economic fallout ranging from substantial insurance pay-outs to increased recovery spending.
As part of the Atlantic hurricane season which runs from 1 June to 30 November with a sharp peak in the number of storms between late August and early September, hurricane Harvey is currently causing unprecedented and catastrophic flooding in south-eastern Texas as the first major hurricane to make landfall in the US since 2005.
Exhibit 1: US 2017 billion-dollar weather and climate disasters
Source: NOAA, BNP Paribas Asset Management, as of 31/08/2017
Exhibit 2: 1980-2017 (as of 07/07/2017) billion-dollar weather and climate disasters mapping (CPI-Adjusted)
Exhibit 3: 1980-2017 year-to-date US billion-dollar disaster frequency (CPI-adjusted)
Source: NOAA, BNP Paribas Asset Management, as of 31/07/2017
Typically, extreme climatic events increase the volatility of US economic data. Tough winter weather conditions are, for example, generally reckoned to be the reason why in recent years, US Gross Domestic Product (GDP) growth in the first quarter (i.e. in the middle of the winter) has tended to be significantly lower than in the other three quarters of the calendar year.
When exceptional weather events occur, our first thoughts are of the resulting suffering and human tragedies. Subsequently we must consider the consequences on economic activity.
At this stage, it is premature to offer anything close to a comprehensive assessment of the economic effects of hurricane Harvey.
A few important points
- It has hit a major population and economic centre. After New York, Los Angeles and Chicago, Houston is the fourth largest metropolitan area by GDP contribution (about 3% of total US GDP) and the fourth most populous city.
- The Texas Gulf Coast region is at the core of the US energy sector, with plants involved in the production of refined products such as unleaded gasoline, diesel fuel and heating oil. Three of the five largest US refineries are located there and account for about 30% of US refining capacity. One half to two thirds of that regional capacity is now offline as a result of the storm. Thus, Harvey may have a different or more pronounced effect on petrol and oil prices than other large storms such as Katrina and Sandy. The area also accounts for about half of all US petroleum and gas exports.
Exhibit 4: Petroleum refineries
Source: EIA, BNP Paribas Asset Management, as of 31/08/2017
Exhibit 5: US gasoline price
Source: Reuters Datastream, BNP Paribas Asset Management, as of 31/08/2017
A bit of perspective
In thinking through the growth implications of such a major storm, it’s important to keep in mind that GDP is a flow concept – the amount of production within a certain period of time – and not a stock concept.
Hence, the destruction of household, business and government property is not directly accounted for in GDP. Instead, GDP will capture how the storm affects near and short-term spending on goods and services. Broadly speaking, storms immediately suppress economic activity in the affected region, but can result in a pickup in economic activity in their aftermath as repair/reconstruction work begins.
So, the overall net effect over several quarters can be an increase in regional GDP growth. After Sandy, for example, the New York region experienced just a one-quarter contraction in GDP growth. Still, even if Texas’ upper Gulf Coast region experiences a large economic contraction in late August and into September – and despite Houston’s large size – Harvey is unlikely to have more than a 10bp to 20bp impact on US GDP growth in third quarter 2017.
Written on 31/08/2017