Institute For Regional Forecasting

Some Early Thoughts on Houston’s Economy after Harvey

September 6, 2017

Harvey was an amazing event, and descriptions of the rainfall as having biblical proportions were not much exaggerated. But biblical analogies can be taken too far, and Harvey was no sign of the Apocalypse for the Houston’s economy. Phrases like catastrophic and “years of coming recovery” were often appropriate for specific places and damages, but too often were turned into generalizations about the metro economy as a whole. After the water drains, and we see the aftermath from the perspective of 30,000 feet, Harvey will look more like one more of the tropical storms that we periodically live through on the Gulf Coast.

I don’t want to sound insensitive to anyone’s personal losses. As a child, I watched my parents lose everything, coming home to find their house scraped off its foundation by a Panhandle tornado. However, I would like to refute some of the more egregious claims about years of economic recovery we face in Houston. This is about the collective Houston metro area, and it is not meant in any way to disparage the individual human suffering and property damage that Harvey has caused.

Now that the storm has cleared, I want to make two points about where we stand as an economic region. First, a brief boom in retail sales and construction is upon us. It comes after every storm. It will smooth the local business cycle over the next few months, offsetting most of the short-term economic disruption caused by Harvey.

Second, the lasting damage is mostly confined to housing and small businesses like retail, bars and restaurants, dry cleaners, grocery stores, etc. The big pieces of Houston’s economic base – drilling and exploration, Ship Channel industries, medicine, space – sustained relatively little damage, and remain firmly in place to keep the economy moving forward. Claims of large, sustained losses to local production and income are alarmist, and don’t fit the history of these storms on the Texas Gulf Coast.

What ultimately will set Harvey apart will be heavy damage to homeowners and small business, and large uninsured losses. If we are concerned about the economy, this is the place to focus first. Even these sectors will see widespread and rapid healing similar to past hurricanes, but Harvey’s size, the extent of flooding, and lack of flood insurance means that historical recovery patterns could fall short for many.

The Coming Boom in Retail Sales and Construction

We are on the brink of a short but intense boom led by reconstruction. After every storm comes the clean-up and repair, and we will soaring sales of automobiles, wallboard, carpet, and furniture. I am not suggesting we all burn down our house as a path to economic prosperity, but just that once the damage is done, the repairs must be made. The massive storm-driven losses of capital are behind us, and we start generating storm-related income and employment now.

I looked at the sales tax allocations for METRO MTA and the City of Houston after Hurricane Ike in 2008, and adjusting for economic conditions at the time, both got a one-time, one-quarter bonus of about 9 percent in tax revenue. If similar storm-related spending took place in Houston in late 2016, for example, the entire metropolitan area would have seen storm-related spending of about $2.3 billion, and spending in the City of Houston alone would have been $1.5 billion. Is Ike-related spending a good analogy for Harvey? They were certainly not similar storms. Harvey was an unprecedented flood, and Ike came with street flooding, storm surge and major wind damage. Just accept the figures as an example of the spending impact that follows on the heels of a storm like this.

This is a one-time boost, similar to that brought by a Super Bowl or Y2K, and the spending probably won’t carry past the next three months. There also will be plenty of construction work, and local labor should be available. Given the economic slowdown in Houston, there is now virtually no office construction, industrial is rapidly winding down, and there are only 8,000 apartments left in the pipeline. We were building 25-30,000 apartment per year not long ago. General economic data such as employment may be weaker in August and September due to storm-related disruption, but should rebound in October and November.

Many repairs happen very fast. Highly specialized companies work these disasters, drying out large spaces, for example. I am sure hundreds of trucks were positioned outside Houston waiting for the water to go down, and crews must have quickly moved into the region. Houstonians know the post-storm drill from well-earned experience – get the carpet and wallboard out, clean out the muck, shop for bleach, and get the electrical system checked out. You can at least live in the house until cosmetic repairs are made.

However, the reach of the flooding across the metro area is an important qualification to any comparisons to past storms, at least in terms of the speed and extent of repairs. For Houston, the damage from Harvey is almost all from rising water, and much of it is will not be covered by a standard home-owners policy. Many areas damaged by Harvey were not in the historic floodplain, having never been inundated before, and owners made a rational decision not to buy flood insurance. The cost of repairs, however, now falls on the homeowner.

Mortgage holders outside the 100-year floodplain generally were not required to have flood insurance, and we need to give thought to the consequences for lenders. At some level of damage, a little more rational thinking by homeowners may suggest they walk away from the house.

Houston’s Economic Base is Largely Undamaged

The big drivers of Houston’s economy did not come through Harvey unscathed, but most sustained little damage that will slow things down for more than a week or two. Houston’s economic base has four parts: upstream exploration and production, downstream refining and petrochemicals, the Texas Medical Center, and the Space Center.

Most medical activity in Houston is non-basic activity, strictly intended to serve the local community. Medical services for Houston residents have been moving steadily out of the Texas Medical Center for years, and into the suburbs. Despite the myths that surround the Medical Center, only about 10 percent of patient care at the Texas Medical Center counts as basic activity, i.e., referrals from outside the metropolitan area.

The main exports from the Texas Medical Center are education (two medical schools on campus, an affiliate medical school in Galveston, state dental school, nursing schools, etc.), along with billions in research. The Texas Medical Center seems to have learned important lessons from Tropical Storm Allison. The back-up electric generators were moved from hospital basements to the roofs, and new flood gates and other protections at the Medical Center worked well. Disruption to patient care was small, and research and education will resume quickly.

As for the Johnson Space Center and its contractors, they are located in the flood-prone southeastern part of the metro area. But we are mostly talking about white-collar, office-tower work. Now that employees can get around the city again, things should return to normal quickly. Meanwhile, the Space Station is still up there, and they found a safe place to store the telescope that will replace Hubble.

We do not drill for oil in Houston, and a working rig inside the metro area is a rare sight. This is a global engineering center, and -- like medicine and space -- it is highly technical, white-collar, and takes place in an office tower. Given modern communications and laptops, much of the work probably continued through the storm as employees worked from home. Work time lost to the storm will be much less than time out of the office.

Oil’s blue-collar work in Houston is its production of machinery and fabricated metals that supports world-wide drilling. Its roots are along Hardy Street, the old Machine Shop Row. There are still a lot of oil service companies in the Greenspoint area, and the modern industry stretches around Belt 8 from IAH toward the Energy Corridor. This is another flood-prone area, but it is it is unlikely that factories or machine shops have been damaged to the point that they collectively could not support U.S. or global drilling. There is substantial excess capacity in the industry. The domestic rig count is 940, less than half of what it was two years ago, and drilling activity is again forecast to fall over the next couple of quarters. The downturn in drilling activity forced many machine shops to take work from other industries, or they have been sold. But the drilling machinery business is still there, just operating on a depressed level.

As Harvey moved toward Corpus Christi, the refining and petrochemical plants along the Ship Channel had few plans to shut down. No wind was expected, no storm surge, just possible street flooding. But shutdowns became widespread as Harvey backed into the Gulf after landfall in Corpus Christi, and especially once the flooding made it difficult to get around Houston. Employees were at risk, and you don’t want to operate these plants if the fire department can’t respond when you need them.

These plants are steel piping systems on massive concrete foundations, designed to withstand heavy storm surge. In storm surge, the plants might be at risk if water rises above the concrete foundation, reaching electrical motors. It might take a couple of weeks to change them out after the storm. The Mississippi River refineries that were down for 6 or 8 months after Katrina saw storm surge that reached their control rooms, requiring a rewiring of the plant’s electrical systems.

Harvey never generated this kind of surge in Houston, nor any threat of serious damage to these plants. The Ship Channel should restart slowly but normally. The problem here will be the restart of complex continuous-processing systems, compounded by the fact that many Houston chemical plants are suppliers for one another. But it took only a couple of weeks after Hurricane Ike to make good strides in getting the chemical complex running, and this was after significant surge and wind damage to some plants.

There are the usual gasoline price increases associated with past shutdowns, the kind that happen with every approaching storm. But there should be no medium- or long-term shortages of gasoline, kerosene, jet fuel, PVC, polyethylene, polystyrene, or much of anything else made on the Ship Channel.

The Port closed for a few days because of Harvey, but with no direct hit from the storm, there was not the usual week to 10 days of time lost to clearing the Ship Channel of debris. There is no lasting damage to facilities. The Port is most important as an extension of the local oil industry, with eighty percent of its tonnage being crude, oil products, petrochemicals, plastics and fertilizer. Once the Ship Channel restarts, it will be able to move its products.

Conclusion

I have deliberately stayed at a distance from the detailed reports on these industries and businesses. I am sure there are a hundred small counter-examples to every generality stated here. But as I said earlier, the generalizations are to gain altitude and perspective. And to make the point that we must be careful talking about huge losses of local income and production or “years of economic recovery.” If we mean Houston’s business cycle, growth prospects, or progress in Houston’s economy, the discussion must turn to the big, basic industries – and they should be just fine.

Housing and small business took the brunt of the flood, sustaining unprecedented and widespread damage. Losses are unusually high and many uninsured. Much of the housing and small business sector will heal quickly, just as it does after every storm, but big parts may not. The lasting consequences of Harvey are in what was unique about the storm – its widespread and uninsured damage to individual structures.

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