Getting a Handle on Harvey

Transcription

1 August 28, :52 PM GMT US Economics Getting a Handle on Harvey Natural disasters are never good for the economy, but they can cause a temporary increase to GDP. We provide our preliminary thoughts on how Hurricane Harvey might affect the data, and possibly the debt ceiling deadline. MORGAN STANLEY & CO. LLC Ellen Zentner ECONOMIST Ellen.Zentner@morganstanley.com Robert Rosener ECONOMIST Robert.Rosener@morganstanley.com Michel Dilmanian ECONOMIST Michel.Dilmanian@morganstanley.com For important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 When Nature Strikes It's hard to fathom the scope of the disaster that struck the Texas Gulf Coast beginning late Friday, August 25, and continues with heavy rains as we write this. The largest affected area, Houston, is the nation's 4th largest city and its 5th largest metropolitan statistical area (MSA). Key facts and figures on the region: The Texas Gulf Coast represents about 20% of the nation's oil refining capacity. As of the morning of Monday, August 28, the hurricane is estimated to have forced about 12% of national capacity offline. Texas accounts for about half of petroleum and gas exports from the US. Greater Houston accounts for 3.5% of the nation's housing starts, 2.6% of retail sales, and 2.8% of GDP. In other words, what happens in Houston can be seen in the US aggregate data. The 10,062 square mile area of Houston MSA is home to 6.5 million people, who make up 2.1% of national employment. The National Climatic Data Center estimates total damage from Hurricane Katrina to have been around $160bn (Exhibit 1). Thus far, initial media-reported estimates of Harvey's damage range from $30bn to $40bn, but the storm is not yet over so this preliminary estimate should be taken with a grain of salt. Nevertheless, it is clear that the damages will be in the billions of dollars and Harvey will go down on the record as one of the top 10 major hurricanes to hit the US since

3 Exhibit 1: Top 10 Major Hurricanes in the US Since 1980 Estimated Inflation-Adjusted Damage in $Billions Storm Date Damage ($bn) Katrina August 25-30, 2005 $160.0 Sandy October 30-31, 2012 $70.2 Andrew August 23-27, 1992 $47.8 Ike September 12-14, 2008 $34.8 *Harvey August 25, 2017 $30-$40 Ivan September 12-21, 2004 $27.1 Wilma October 24, 2005 $24.3 Rita September 20-24, 2005 $23.7 Charley August 13-14, 2004 $21.1 Hugo September 21-22, 1989 $18.2 Irene August 26-28, 2011 $15.0 Note: * = range of initial media-reported estimates as of August 28, Source: National Climatic Data Center, Morgan Stanley Research 3

4 The Economic Impact of Natural Disaster Natural disasters affect the overall economy through a variety of channels, including property losses which are measured as a change in the volume of fixed assets and uninsured losses, which affect measures of personal income and are essentially insurance payouts (measured by the consumption of fixed assets less business transfer payments). 1 Measuring the longer-term effects of natural disasters is a much more difficult task that depends on not just the severity of the disaster itself, but on its geographic scope. Because they usually affect a very large geographic area, hurricanes in particular are more costly to the overall economy than other disasters (floods, earthquakes, and tornadoes, for example). The Federal Emergency Management Agency (FEMA) called Hurricane Katrina, which made landfall in Louisiana as a Category 5 on August 29, 2005, "the single most catastrophic natural disaster in US history." Katrina affected not just a large geographic area (93,000 square miles from Florida to Texas), but also a region that is central to oil extraction and refining in the US. The Bureau of Economic Analysis (BEA) estimated the direct losses from Katrina at about $100 billion but the dislocations immediately thereafter and the reconstruction efforts that followed had a long, lagged impact on new production. 2One good example, on the back end of "Superstorm" Sandy in October 2012, thousands of motor vehicles needed to be replaced in the Northeast. An estimated 650,000 homes were also damaged or destroyed by Superstorm Sandy. In October 2005 testimony before Congress, then Congressional Budget Office (CBO) director Douglas Elmendorf underscored that Hurricanes Katrina and Rita would have significant, but temporary affects on GDP, but overall the recovery and rebuilding efforts would likely more than offset the drag in the following quarters. Part of what makes it difficult to get at the net effects of natural disasters is the temporal effect of preparation and reparation on the front and back end of the event. For Hurricane Harvey, as with Hurricane's Katrina and Superstorm Sandy, preparations ahead of the storm led to a ramp up in sales of emergency supplies, including water, batteries, and building supplies, but may have also cut into back to school shopping. Houston public schools were scheduled to begin Monday, August 28 but that start date has been postponed with storm activity ongoing. Finally, we would be remiss if we did not acknowledge the effect of rising gasoline prices on the pocketbooks of all Americans. As is typical, gasoline prices have spiked in advance of Hurricane Harvey as investors take on board what a prolonged shutdown in the nation's predominant region for refining means for supply of motor grade gasoline. Our Refining & Marketing team sees more upside for prices ahead as Harvey's impact of heavy rains and flooding is likely to linger and further remove refining capacity (see Refining & Marketing: Harvey Tightens Markets (28 Aug 2017)). We estimate that every sustained 10 cent rise in the price per gallon of gasoline acts as a $10bn tax on US households. Essentially, should higher prices be sustained it would "rob" other 4

5 categories of spending as dollars are diverted to filling tanks for this fairly price-inelastic good. In terms of its effect on GDP, the timing of Hurricane Harvey is key. We have over a full month left in the third quarter, which means the economic effects of Harvey may be fairly neutral on 3Q as a whole, but the lagged effects of rebuilding homes and replacing motor vehicles can last longer, providing a lift to GDP in 4Q and beyond. At this early stage we are not inclined to adjust our economic forecasts, up or down, and will pay close attention to the final assessment of damage, rebuilding, and timing of how it all plays out. 5

6 By the Numbers: Effects on the Data Stream Effects on employment data key points: Severe weather events are more likely to have an impact on average weekly hours than on payroll employment. Hours refer to any paid time during the pay period, while an employee would have to be out of work without pay for the entire period in order to be excluded from the payroll employment number. The reference period for the establishment survey, which produces the headline payroll number, is the pay period that includes the 12th day of the month. Therefore, the impact of Harvey will not be captured in the August employment report. In order to be excluded from payrolls in the September employment report, an employee would have to be out of work without pay for the full pay period that includes September 12th. Most employees in the survey have a 2- week, semi-monthly or monthly pay period. In the household survey, the reference period is generally the calendar week that includes the 12th of the month. Individuals who are unable to work for the entire reference week due to weather-related events are still counted as employed in the household survey, whether or not they were paid. Therefore, Harvey is unlikely to affect the unemployment rate and other measures from the household survey. The household survey collects data on individuals who were not at work due to bad weather and individuals who usually work full-time but had reduced hours due to bad weather (Exhibit 4 & Exhibit 5 below). Effects of Hurricane Harvey are likely to be captured in these metrics. Jobless claims will be the earliest data to show the impact of Hurricane Harvey. Hours Worked, as Opposed to Employment, Are Affected Most Though Harvey will have no impact on the August payroll report; the survey week is the week that includes the 12th of the month, so the August survey period was fully captured before the storm hit. Moreover, we are a few weeks away from the next survey period in September and Houston and its surrounding areas will have at least begun to climb out of the mess left in the wake of Harvey by then. According to the BLS, severe weather tends to have a much greater impact on hours worked, as opposed to payroll counts. This is because disasters often prevent people from working their normal schedule, whereas the bar for a reduction in employment is higher if you receive pay 6

7 for even one hour of work during your payroll period, you are considered employed. 3 Jobless claims will be the earliest data to show the impact of Hurricane Harvey. In the wake of Hurricane Katrina there was a sizable and prolonged impact on initial claims. The peak effect occurred three weeks after the storm hit when Katrina-related filings alone totaled more than 100,000. Drilling into the details, the increase in claims in Louisiana is striking (Exhibit 2). Likewise, claims spiked in New Jersey in the weeks following Superstorm Sandy (Exhibit 3). Exhibit 2: Initial Jobless Claims in Louisiana Exhibit 3: Initial Jobless Claims in New Jersey 80,000 70,000 Hurricane Katrina (August 2005) 50,000 45,000 Hurricane Sandy (October 2012) 60,000 40,000 35,000 50,000 30,000 40,000 25,000 30,000 20,000 20,000 15,000 10,000 10,000 5,000 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Initial Jobless Claims, Louisiana Source: Department of Labor, Morgan Stanley Research 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Initial Jobless Claims, New Jersey Source: Department of Labor, Morgan Stanley Research The effects of Hurricane Harvey are also likely to be reflected in two components of the Bureau of Labor Statistics' household survey, which produces the headline unemployment rate in the monthly employment report. These components measure the number of respondents that are not at work due to bad weather or at work part time due to bad weather. Both metrics have picked up sizable impacts of previous severe weather events. For example, following a February 2010 blizzard in the Northeast, "not at work due to bad weather" spiked to over 1,000,000 from a prior 12-month average of 106,000 an almost ten-fold boost (Exhibit 4). Similarly, the count of respondents at work part-time due to bad weather increased by a factor of more than 15x during the February 2010 blizzard (Exhibit 5). We suggest paying particular attention to these two components in order to gauge the lingering effects of Harvey in the September employment report, to be released on October 6. 7

8 Exhibit 4: Effects of Severe Weather Captured in "Not at Work Due to Bad Weather" Thousands 1,200 1, Not at work due to bad weather Average, prior 12 months , Post-Katrina Post-Sandy Feb 2010 Snowstorm Source: Bureau of Labor Statistics, Morgan Stanley Research Exhibit 5: Persons at Work Part-Time Due to Bad Weather Jan 2011 Snowstorm Feb 2014 Winter Storm Thousands 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, At work part time due to bad weather Average, prior 12 months 523 5,344 1, Post-Katrina Post-Sandy Feb 2010 Snowstorm 4,857 Jan 2011 Snowstorm 6, Feb 2014 Winter Storm Source: Bureau of Labor Statistics, Morgan Stanley Research Motor Vehicle Sales In the wake of Hurricane Sandy replacement needs drove vehicle sales and used car prices higher (see notes from our Autos & Autos Related team, here, and here). One could argue that the effect from Hurricane Harvey could also be great as Houston MSA accounted for 2.55% of national retail sales in 2016, a good chunk of which go to motor vehicles. Moreover, buying habits suggest that a greater number of trucks versus cars will be needed. Housing Activity Hurricane Sandy, which hit the Northeast in late October 2012, was the second most costly hurricane to hit the continental US at the time. Revised data show that in November, starts of single-family homes declined by -6.9% in the US, driven primarily by a decline of -48.8% in the Northeast. The pace of starts then spent the next eight months playing catch-up with new and replacement demand before settling back to trend. Retail Sales As mentioned previously, retail sales may see a pre-hurricane bump late in the month that will help the August numbers (reported on Friday, September 15). Sales may be 8

9 dented in the days during the storm, but restocking and aid to the area may result in a lift to retail sales in September. Hurricane Katrina provides another useful example here. In the wake of the hurricane Wal-Mart closed some 120 affected stores across the Gulf states, but also saw a boost to sales across the country related to relief aid. Other companies such as Home Depot and Lowe's also saw sales rise as a result of the cleanup and repair efforts. 9

10 The Debt Ceiling Deadline Our current estimate of the debt ceiling deadline is mid-october (see Global Macro Forum - US Policy Risk - Fall Warmup (14 Aug 2017)). This estimate could be affected by cash transfers from the Treasury in response to Hurricane Harvey, but ultimately we expect funds from the Federal Emergency Management Agency's (FEMA) Disaster Relief Fund (DRF) will be enough to cover near-term disaster response needs, and additional appropriations can be made in the 2018 budget and/or after the debt ceiling is resolved. If additional funds are appropriated without raising the debt ceiling first, this risks bringing forward the timing of the debt ceiling deadline. As of August 24, the Treasury's cash balance stood just north of $50bn (Exhibit 6), down from an average $312bn balance during This is notably below levels targeted when the Treasury changed its cash balance policy in May 2015 in order to "hold a level of cash generally sufficient to cover one week of outflows in the Treasury General account...enough to protect the US government from potential default for about one week, should a catastrophic event ever inhibit the Treasury's ability to market debt." 4 Exhibit 6: As of August 24, the Treasury's Cash Balance Stood Just North of $50bn Bil. $ 500 Treasury Cash Balance Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Source: US Treasury, Morgan Stanley Research How Will the Federal Response to Hurricane Harvey be Funded? On Friday, August 25, President Trump approved a major disaster declaration for Texas, making federal funding available to affected individuals and to state and eligible local governments on a cost-sharing basis for emergency support functions. 5 That declaration triggers the availability of funding from FEMA's DRF. The DRF is used "to pay for ongoing recovery projects from disasters occurring in previous fiscal years, meet current emergency requirements, and as a reserve to pay for upcoming incidents." 6 As of last Thursday, the DRF balance was $3.3bn, and FEMA has said that it has enough funds "sufficient for the immediate lifesaving and life sustaining needs that may emerge as a result of Hurricane Harvey." 7 In the event existing funds in the DRF are not sufficient to respond to Hurricane Harvey the DRF is funded annually through Congress' regular appropriations process, and 10

11 supplemental appropriations are frequently made available for pressing disaster assistance needs. These supplemental appropriations occurred with a lag, however, so if history is any guide we would expect additional funds for FEMA's response to be authorized either by itself or with a full continuing resolution. If additional funds are appropriated without raising the debt ceiling first, this risks bringing forward the timing of the debt ceiling deadline, but it is more likely that these issues would be dealt with together. 11

12 Other Hurricane Harvey Research CMBSignals: Exposure to Hurricane Harvey (28 Aug 2017) Specialty Retail & Dept Stores: Greenberger's Look at the Mall (GLAM): Summer Days Drifting Away (28 Aug 2017) Refining & Marketing: Harvey Tightens Markets (28 Aug 2017) P&C Insurance: Initial Thoughts on Hurricane Harvey (28 Aug 2017) Chemicals: E/PE Price/Harvey Update; Propylene Settles Up, Margins Down; Sasol's Lake Charles Chemicals Project on Track (28 Aug 2017) Maritime Industries: Dry Bulk Stocks Rise Strongly Following The Recent Iron Ore Rally (28 Aug 2017) 12

13 Endnotes 1 See this table for an example of how the Bureau of Economic Analysis broke down its estimates of 2005 Hurricane Katrina's effects on personal income: 2 See this BEA FAQ on how it takes into account natural or man-made diasters. 3 Further from the BLS, "About two-thirds of all employees in the payroll survey have a 2-week, semi-monthly, or monthly pay period. Employees who receive pay for any part of the pay period, even 1 hour, are counted in the payroll employment figures. Because the hours that employees work can be impacted by these special circumstances, but those employees might still be counted as employed by an establishment if they were paid for work done during a portion of the pay period, it is not possible to quantify the effect of catastrophic events on estimates of employment from the establishment survey."

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