Our “blog machine” is back up and running. As you know, I’ve referred to my blog in the past as “Riding the Rockies” but this morning, I’m going to refer to it as Riding the Wave since we’re talking about the impacts of Hurricane Harvey on the southern regional economy and on the nation.
First, our thoughts and prayers go out to the victims of what may emerge as the largest natural disaster in the history of the nation. Your “Alpha” team is watching this pretty carefully and there has been discussion about buying a motorized semi-rigid inflatable and driving through the night to volunteer to assist victims. More to follow on that since we recognize our responsibility to each of you, our clients, first and foremost.
Second, We can look to past natural disasters to glean some guidance but as the National Weather Service opined yesterday, “This event is unprecedented and all impacts are unknown and beyond anything experienced. “
We know that the flooding is wiping out crops from cotton to cabbage. There had been a “bumper” crop of cotton almost ready for harvest which is lost. Texas and Louisiana are significant agricultural states and the summer crops that will be lost will nationally impact prices for the next 12 months. You can expect increases in the cost of related items from Cole slaw to t-shirts. Increased costs in these areas results in less money in the economy and a reduction in margins for many businesses.
At the gas pump, we know, watching gasoline futures this morning that there will be two immediate impacts which are a higher cost for gasoline since roughly 20% of U.S. petroleum refiners are located in the impacted area and these refiners are idled and may idled for several weeks. This will result in localized energy shortages as well as a backup in crude oil stocks. While oil prices may dip due to oversupplies, refined products should increase due to reduced supply. Expect higher gasoline prices nationally which will have a negative impact on GDP in the third and fourth quarters of 2017. This will result in a lower U.S. savings rate
We know from the Katrina aftermath that there will be widespread unemployment in the Houston area for a long period of time. Flooding tends to result in more a more significant displacement of jobs. Employers may not have had adequate flood insurance to enable them to rebuild, they may not want to rebuild in a “flood zone” and because competition in other jurisdictions for companies to move is so great, they may be incented to move elsewhere. As well, this may provide companies with both money and incentive to automate as they rebuild, reducing headcount.
Retail sales and auto sales will be impacted by Hurricane Harvey. The early indication is that over 3 million vehicles may have been damaged by this storm. The immediate impacts will be a back-up in new car and auto part deliveries, followed by a surge in new car and parts demand once the insurance checks begin flowing.
Finally, it is estimated that fewer than 20% of the homes in the area affected by Hurricane Harvey have flood insurance. Put another way, 80% of the flood related losses may not be covered by insurance. This has the potential for negatively impacting bank lenders with local real estate loans, businesses shutting down, and individuals having to spend savings and discretionary income on rebuilding taking it from other sectors of the economy.
Materials retailers like Lowes and Home Depot may benefit from Harvey as well material manufacturers like U.S. Gypsum and Georgia Pacific may see a pickup in sales.
Finally, early reports are that in spite of the size of this storm and the damage it will leave, property casualty insurers like State Farm, Travelers, Allstate, and others have enjoyed several years of relatively low loss rates and have fat balance sheets enabling them to absorb this storm without much impact. Because so much of the impact is related to flooding which is often excluded from homeowner’s insurance, we do not expect any kind of dramatic impact on earnings or share prices of these companies. Expect to see higher property casualty premiums, nationally over the coming months. Expect as well to see significantly higher National Flood Protection Insurance premiums. This agency is already $24 Billion in debt (another good example of how “Government” fails to do it as well as private enterprise) and this number will only increase with this natural disaster. I believe that Congress will insist that residents with covered properties in coastal and low-lying areas pay for the risk and that flood insurance premiums will increase significantly over the next 3-5 years.
We know that this is a developing story. Like the aftermath of Hurricane Katrina, this is going to have a long-lasting impact on this region and the national economy. Unfortunately, the greatest impact is likely to be felt amongst those least able to absorb it, the hourly worker whose job is lost and who is now trying to put their
household back together. From an investment perspective, we are looking carefully at the “winner’s and potential loser’s” who will result from the aftermath of this epic event.