Over the past few days, Hurricane Harvey has left physical destruction and human tragedy in its wake. This record-setting storm will certainly take its place with other major hurricanes, including Katrina and Sandy, in American history. Both Texas and Louisiana have been hit extremely hard by Harvey, and it will take months, even years, for those areas to recover. Our thoughts are with all of those affected.
The damage and ongoing effects for the country as a whole, however, will be harder to define. Perhaps the best way to determine what may happen going forward is to use past storms as a guide.
What we know so far
The immediate economic effects have been limited. Texas, and Houston in particular, is the core of the U.S. petroleum industry. Several major refineries have been shut down; this has limited gasoline production, and prices have increased in response. The stock market, on the other hand, has moved up over recent days, and it’s now close to an all-time high. Despite the local damage, then, the market’s reaction suggests the effect on the country as a whole has not been severe. This is consistent with what we’ve seen after past storms.
Assessing the economic damage
Although there has not been an immediate reaction, there certainly will be some economic damage. Specifically, we might see short-term negative results, as higher gasoline prices are likely to hit consumer confidence and spending. The destruction in the Houston area, which is the fourth-largest metro area in the country, will also hurt employment and economic growth until the rebuilding process begins. After Katrina, national employment growth slowed sharply, and the effect could be worse with Harvey.
The good news is that this slowdown should be short lived. Refineries can be brought back on line relatively quickly, as we saw with Katrina. Further, employment growth has typically resumed within a couple of months after past major storms, including Sandy and Katrina. In general, those effects were sharp but short, which will presumably be the case with Harvey as well.
The rebuilding process
Once the storm passes and the immediate damage has been assessed, the rebuilding process will begin. This process can help the economy not only in the affected areas but also nationally. Thousands of jobs in every economic sector will be created in the rebuilding effort, and materials demand will increase spending substantially. Government aid will also help, with the additional spending stimulating companies throughout the country. Although analysts are projecting slower growth over the next quarter or two, the reconstruction process should help growth after that.
Economy poised to weather the storm
The U.S. economy is well poised to weather the damage from Hurricane Harvey. With confidence high and the economy growing faster than expected, even a slowdown would leave growth intact. The economy has successfully withstood many shocks over the past couple of years, and it is likely to endure this one as well.
In all likelihood, the financial markets will keep following the economy. As such, we can expect the effects from Harvey to be limited and short term. Stock markets, in particular, usually look beyond short-term effects to the longer term, which would indicate that the potential for faster growth in the reconstruction process will help market performance. In fact, this is just what we have seen in recent days. It is also what has occurred with past storms, including Sandy and Katrina—suggesting that any damage to the markets from Harvey has already passed.
The devastation from Harvey will take years to fully remedy—if it can be remedied at all. There will certainly be short-term effects, but the economy remains sound overall and is well positioned to keep growing.
None of this is to minimize the tragedy underway in Houston and Louisiana, and unfortunately, many lives will never be the same. But this is a challenge, just as with Katrina and Sandy, that we will meet as a nation. We all need to help, and we will. And we will rise above.
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Authored by Brad McMillan, CFA®, CAIA, MAI, senior vice president, chief investment officer, at Commonwealth Financial Network®.
© 2017 Commonwealth Financial Network®