With reported wind speeds of up to 130 mph and over nine trillion gallons of water falling in torrential rains on the coast alone, the destruction rendered by Hurricane Harvey will surely go down as one of the largest and most devastating hurricanes in US history. Initially, the world has watched in horror as pictures of the destruction and stories of the human toll were beamed around the world. In equal measure, countless acts of sacrifice and bravery also emerged, as tales of service by emergency services, the army and even concerned private citizens filtered across the airwaves.
As Texans begin the huge task of rebuilding and returning to normal, the narrative will turn from the human cost to the rebuilding cost. As with any major disaster, the economic cost of picking up the pieces is immense. Recent hurricanes like Katrina in 2005 and Sandy in 2012 show how significant the devastation can hit local economies. In these cases, property losses were in the realm of $160bn and $70bn, respectively.
The current estimates put the property loss from Harvey at between 30 to 60 million, below the levels found in the other major hurricanes mentioned. Property loss represents the main immediate measuring stick for hurricane damage since the primary damage rendered by hurricanes are property damage.
However, the full economic cost of a hurricane goes well beyond the simple need to rebuild. Generally speaking, as the rebuilding of infrastructure and properties occur, the time and loss of revenue can impact businesses. Some businesses will be unable to continue running in the short term, as necessary infrastructure or buildings will need to be rebuilt. Others may not require rebuilding, but other factors like lack of office space, destruction of data centers or loss of key personnel can mean that efficiency is compromised, creating time lags before optimal service resumption occurs.
These time-related issues can cost a company its market share or customer base. In some cases, this can ruin a business.
For those displaced by the hurricane, the cost of renting is likely to increase. Already, reports of a decrease in available rental stock have triggered expectations that rents could rise as much as 10%. This is not limited to individuals. Post Katrina and Sandy, office prices also saw an increase in rents, as stock flagged in the short/medium term. With the sudden increase in renting for both businesses and individuals, deciding to leave the area would be a realistic option for some.
On the other side of the coin, rebuilding will have certain positive economic effects. Certainly, building and construction will see significant increases in activity. Ancillary services like storage or hotel properties will likely see increases in returns. Job growth in these areas will also be strong for several years as the rebuild occurs.
Ultimately, the devastation caused by Harvey will be measured in human costs, and rightfully so. For the economic costs, whilst the short and medium term considerations will dominate the thinking, it is the long term outcomes that will determine how devastating the hurricane truly was. Rebuilding businesses is not the same as rebuilding a house, and long term investment and market changes can be impacted by the disruption caused by the hurricane. For context, Hurricane Katrina, 12 years after the hurricane, still has Non-Farm Payrolls at 7% lower than before the storm.
Our hearts and prayers are with the people affected by the storm. Let us also pray that the economic recovery be both strong and lasting.Get the 5 most predictable currency pairs