Hurricane Harvey’s Impact on the Economy and the Investment Markets

It seems wrong to be writing about the stock market and the economy in the wake of the devastation Hurricane Harvey has left behind, but it is what I do. I am an investment writer and analyst. It might seem heartless, but I assure you it isn’t. My roommate from college lives in Houston and I have been checking in on him every day. I have other friends in the area as well. My thoughts are with the people of Texas.

That being said, there are several ways that this historic storm is going to affect the economy, not just the economy of Texas, but the whole country. The most obvious impact will be felt in the energy sector. With so much of the country’s refining operations located along the Gulf Coast of Texas, many refineries are shut down at this time. Estimates are that 2.2 million barrels per day of refining capacity are offline.

The immediate thought is that oil and gas prices will rise. Gas prices are already rising, however oil prices have been declining. How is that? Well, while the refineries that take oil and turn it in to gasoline may be shut down, but the oil is still pumping. The oil platforms in the Gulf didn’t suffer as much damage and a great deal of the oil refined in the Houston area is brought in from wells that are further inland. We will likely see oil inventories build in the coming weeks while gasoline inventories will drop sharply. Oil has been declining since February and it will likely continue to fall as inventories will build on crude as long as the refineries are closed. The price of crude could test the low from June.

Higher gasoline prices will help refiners once they are back online, but they are losing tremendous amounts of revenue while they are shutdown. Higher gas prices will also hurt other aspects of the economy as well, consumers will be paying more at the pump and won’t have as much to spend elsewhere. We could see the effects in the third-quarter GDP report and it will likely cut the rate of growth by a couple of percentage points.

 

Other Sectors Being Affected

The Houston area is also very prominent in chemical production. Reports are that one-third of the U.S. chemical production has been shut down or slowed. The biggest basic chemicals where shortages are possible are in ethylene and chlorine. These chemicals go in to making PVC, plastics and vinyl. We are talking about an impact on everything from pipes to trashbags to packaging materials.

Many if not most are aware that Texas is the largest beef producing state. There is flooding in 54 counties and according to a recent article in the Dallas News that cited David Anderson of Texas A&M University, there are 1.2 million beef cows in the disaster zone. The pastures are flooded which could make it difficult if not impossible for the cattle to graze and in these rural areas many of the roads are not safe for travel meaning the farmers can’t even get out to check on the cattle.

Shipping and transportation are also huge sources of business for the Gulf Coast. Three of the six busiest ports in the United States are located along the Gulf with Houston ranking second. The ports have been closed for days and will likely remained closed for several more days. All of the major airports in the area are closed and will remain that way for the foreseeable future.

One sector where there is uncertainty is the insurance sector. While the property damage from Harvey is enormous, some estimates are as high as $100 billion, it is mostly from the flooding rather than the wind. Flood damage and wind damage are two very different things with wind damage typically being covered by homeowners insurance and flood damage typically being covered by the federal government. There will certainly be large payouts from the homeowner insurers, but how much won’t be known for quite a while.

One area that will see a boost in business is the building supply sector. As many homeowners look to repair their homes, items such as lumber, concrete, carpeting, drywall, etc. Companies such as Home Depot (NYSE: HD) and Lowe’s Companies (NYSE: LOW) will likely see a boost in business in the region for the third and fourth quarters.

I started this article by stating that it seems wrong to be writing about what will happen in the investment markets in the coming months. While it is what I do, it doesn’t mean that I didn’t struggle with writing this article. Should you feel guilt for reading about how to protect or grow your assets as a result of this tragedy, might I suggest donating any gains to the relief efforts.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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