September 08, 2017

Economics Group

Special Commentary
Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com (704) 410-3277
Jamie Feik, Economist
jamie.feik@wellsfargo.com (704) 410-3291
Hank Carmichael, Economic Analyst
john.h.carmichael@wellsfargo.com (704) 410-3059

Impact of Hurricane Harvey

A Category 4 Hurricane Slams the Texas Coast then Stays a While
Hurricane Harvey made landfall on the Texas Gulf Coast as a category 4 hurricane late in the
evening of Friday, Aug. 24 and hovered in the region for five days, dumping as much as
51 inches of rain in some neighborhoods. Bayous and reservoirs built to shield downtown
Houston overflowed as a storm that prompted the national weather service to add a color to rain
accumulation scales submerged the nations fourth-largest city. The storm was unprecedented,
and the amount of damage it inflicted on structures that had never before flooded translates to a
significant degree of uninsured losses, which will eventually be shouldered out of pocket or by Hurricane
taxpayers. CoreLogic estimated less than half of the properties in the affected area that have a Harvey dumped
moderate/high risk of flooding were not in special flood zones that are required to have flood as much as
insurance. The cluster of issues resulting from Harvey and the emotional and economic losses are 51 inches of rain
staggering, and we endeavor to provide some economic context to frame decisions until official in some places
final loss estimates are available.
A complete accounting of the losses associated with Hurricane Harvey will likely take months or
even years. Early assessments suggest the storm will be one of the costliest on record in terms of
property damage, with large swaths of damages uninsured. While it is still too soon to compile a
precise estimate, total losses are likely to be in the ballpark of $90 billion. Damages to homes will
likely total close to $40 billion and losses of automobiles other household items will be in the
neighborhood of $5 billion. With an economy of more than $550 billion annually, business
interruption will likely total at least $28 billion. Adding in damages to commercial property and
public infrastructure, the total rises to around $90 billion.

Figure 1 Figure 2
Houston MSA Population Growth Contribution to U.S. Real GDP Growth by MSA
Top 20 Metro Areas, Contribution to Growth From 2010 to 2015
Total losses are
In Thousands
210 210 Houston likely to be in
New York
180 180 Los Angeles the ballpark of
Dallas
150 150 San Jose $90 billion
San Francisco
Chicago
120 120
Seattle
Miami
90 90 Atlanta
Boston
60 60 Minneapolis
Denver
30 30 Austin
San Diego
0 0 Detroit
Philadelphia
-30 -30 Charlotte
San Antonio
Nashville
-60 -60
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 0% 1% 2% 3% 4% 5% 6% 7%

Source: Census Bureau, U.S. Department of Commerce and Wells Fargo Securities

This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

 Impact of Hurricane Harvey WELLS FARGO SECURITIES
September 08, 2017 ECONOMICS GROUP

Houstons Economic Buoyancy to Be Proven Once Again

Houstons economy is enormous. The greater region, which includes Houston, Corpus Christi and
Beaumont-Port Arthur, is home to nearly 7.8 million people and has added 824,000 people since
2010. That gain eclipses the entire population of Charleston, S.C. (Figure 1). The Greater Houston
GDP tops $550 billion, which equates to about 3 percent of the nations GDP. Moreover, the
region has accounted for 6.6 percent of the nations GDP growth since 2010 (Figure 2). Houston
is the number one market for new single-family home building and also accounts for about
3 percent of existing home sales. Hurricane Harvey has largely shut down the city, and the loss of
The region has
that activity will certainly be apparent in national economic indicators in the near term. However,
accounted for
much of Houstons capital intensive economy is already back online and service-providing
6.6 percent of
businesses are rapidly reopening their doors. Still, the storm hit Houston just as the regions key
the nations GDP
energy sector was rebounding from the oil price collapse of a few years ago and its vital
growth since
petrochemical industry was seeing strong growth.
2010
Houstons economy was largely stalled in 2015-16 as the downturn in energy exploration hit the
heart of the nations energy sector. Houstons economy was a key support to the nations recovery
from the Great Recession, benefitting from the shale revolution and a significant increase in
investment in refineries and petrochemical plants. Houston was the top job creator in the
first half of the decade, before oil prices began to slide in the back half of 2014. December 2014
marked the peak of Houstons growth, with nonfarm employment up 4 percent (Figure 3). Total
nonfarm employment was essentially flat for the next two years, which is a notable achievement
considering the loss of over 100,000 jobs in mining, manufacturing, construction and
professional servicesthose closely tied to the energy sector. All of those sectors had turned
around by the start of 2017 and were rebuilding their workforces in Houston through July. Total
employment was already up by 2 percent over the year.
Houstonians had endured a period of rising unemployment, as the regions jobless rate increased
from 4.4 percent in December 2014 to 5.5 percent at the end of 2016which equated to around
180,000 unemployed Houstonians, and increase of 40,000 from 2014 (Figure 4). Though metro
area labor force data is subject to revisions, preliminary data indicate unemployment was about
half way back to pre-downturn levels in July, as workers had either found work or left the labor
force. Houstons unemployment rate had already drifted below 5 percent prior to the storm.
What makes
Harvey is certainly not Houstons first rodeo. Devastating storms to hit the region include Ike in
Harvey unique
2008, Rita in 2005, Allison in 2001 and Allen in 1980. What made Harvey unique is the sheer size
is its sheer size
of the storm and the extraordinary amount of rain the slow-moving storm produced. Moreover,
and the
the Houston region has grown so much since the last major storm hit the area, adding
extraordinary
824,000 people just since 2010.
amount of rain
the slow-moving
storm produced Figure 3 Figure 4
Houston vs. U.S. Nonfarm Employment Houston Unemployment & Labor Force
3-Month Moving Averages Percent, Millions of Workers, Seasonally Adjusted
6% 6% 10% 4

4% 4% Thousands
8%
3
2% 2%

6%
0% 0%
2
-2% -2%
4%

-4% -4%
1
2% Unemployed: Jul @ 0.2 (Right Axis)
-6% QCEW: Yr/Yr Pct. Change: Mar @ -0.1% -6%
Employed: Jul @ 3.1 (Right Axis)
Nonfarm: Yr/Yr Pct. Change: Jul @ 1.7%
U.S. Nonfarm: Yr/Yr Pct. Change: Aug @ 1.5% Unemployment Rate: Jul @ 4.8% (Left Axis)
-8% -8% 0% 0
91 93 95 97 99 01 03 05 07 09 11 13 15 17 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: U.S. Department of Labor and Wells Fargo Securities

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Impact of Hurricane Harvey WELLS FARGO SECURITIES
September 08, 2017 ECONOMICS GROUP

Waterlogged Flood Insurance

Private insurance typically only covers wind and water damages from storms. Damages from
flooding are covered separately, with over 90 percent of all flood insurance being covered by the
National Flood Insurance Program (NFIP). The program was created to insure existing homes
built in areas deemed to be at-risk for flooding, while dis-incentivizing new homes to be built in
floodplains. Typically, lenders require homeowners to purchase flood insurance if located in a
100-year floodplain. However, many of the homes damaged in Houston were not in floodplains,
thus were not required to buy flood insurance, and owners often chose to forego it.
The Insurance Information Institute (III) reports that just 15 percent of the 1.6 million housing The out-of-
units in Harris County are covered by the NFIP (Figure 5). To put this into context, in the pocket repair
devastation wreaked by Hurricane Katrina that forced the NFIP to borrow costs to personal
$18 billion from the federal government, roughly half of the flooded homes in New Orleans were property will
covered by flood insurance. With so many more uninsured homes in Houston, a city roughly likely be
four times the size of New Orleans pre-Katrina population, the out-of-pocket repair costs to astronomical on
personal property will likely be astronomical on an aggregate basis. an aggregate
basis
Figure 5 Figure 6
Houston Flood Insurance Single-Family Building Permits by MSA
Share with T otal Thousand Permits Issued, YTD July 2017, NSA
Houston, TX
County NFIP Housing Dallas-Fort Worth, TX
Insurance Units Atlanta, GA
Phoenix, AZ
Aransas 42 1 5,355 Austin, TX
Orlando, FL
Galv eston 41 1 32,492 Washington, DC
Charlotte, NC
Brazoria 26 1 1 8,336 Nashville, TN
Tampa, FL
Orange 24 35,31 3 Raleigh, NC
Calhoun 21 1 3,291 Riverside, CA
Los Angeles, CA
Chambers 21 1 1 ,41 0 Denver, CO
Las Vegas, NV
Nueces 20 1 41 ,033 Jacksonville, FL
Seattle, WA
Jefferson 18 1 04,424 New York City, NY
Minneapolis, MN
Harris 15 1 ,598,698 Chicago, IL
Cameron 12 1 41 ,924 0 10 20 30
Thousands

Source: National Flood Insurance Program, Insurance Information Institute, U.S. Department of
Commerce and Wells Fargo Securities
Homeowners without flood insurance can apply for federal disaster relief, but the funds received
are typically only low interest rate loans from the government. This essentially is taking out a
second, lower-cost mortgage on your home, which could create issues for those who already have
large mortgage balances or have already tapped into home equity lines during times of financial
hardship. After applying for federal grants or loans, assuming the request is approved, the funds
could be delayed, leaving families without a permanent home for an extended amount of time.
Following Hurricane Katrina, many homes were abandoned due to the inability of homeowners to
repair damages, especially those with large mortgages.
In addition, those with flood insurance are not quite out of the water yet. The NFIP is currently NFIP claims are
around $24 billion in debt stemming from hurricanes Katrina, Rita and Sandy. Before Katrina, estimated to be
the NFIP was charging premiums in the Gulf of Mexico that were consistent with a low between
probability of floods, which clearly turned out to be off base. With the lower premiums being paid, $7 billion and
the program ran out of money. Risk Management Solutions, a risk modeling company, estimates $10 billion
between $7 billion and $10 billion in insurance claims from the NFIP, which equates to about
$65,000 per claim and approximately 100,000 to 150,000 claims. The U.S. Treasury Department
extended the program a line of credit following Katrina and the availability on that line is now just
$5.8 billionwell short of the estimated damages that will be realized by Hurricane Harvey. This
means claims will most likely be delayed from the NFIP as well, and the federal government will
need to extend more funds to the program.

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Impact of Hurricane Harvey WELLS FARGO SECURITIES
September 08, 2017 ECONOMICS GROUP

This week, a bipartisan deal was struck to approve additional funding to the Federal Emergency
Management Agency (FEMA) and suspend the debt ceiling issue until Dec. 8. The separate bills
essentially will fund the federal government for the next three months and provide $15.3 billion to
FEMA in preparation for aid that will be necessary for damages associated with Hurricane
Harvey, as well as Irma, which, as of this writing, is threatening South Florida.
Ultimately, the small percentage of homes covered by the NFIP in Houston and the financial
Houston should shortcomings of the program means taxpayers and impacted households will likely end up paying
get up and the majority of repair bills. Those who cannot or will not repair their own homes could be forced
running fairly to abandon them. This may result in reduced population growth in Houston, which had been one
quickly. of the nations fastest growing major metropolitan areas. A drag on personal spending in the area
Rebuilding will is likely as well, and we could see stricter building codes and tighter zoning requirements put in
take much place to reduce the risk of future storms. With much of its economy tied to the capital-intensive
longer. energy business, Houston should get up and running fairly quickly but output will not be back at
full strength for some time. Rebuilding will take much longer, as is typical following a large-scale
flood. Insurance and federal aid will need to be sorted out before structures can begin to be
repaired. Moreover, the extent of damages inflicted on the area may cause some businesses to
reexamine their supply chain and push some investment that would have gone to Houston to
other parts of the country.

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Wells Fargo Securities Economics Group

Diane Schumaker-Krieg Global Head of Research, (704) 410-1801 diane.schumaker@wellsfargo.com

Economics & Strategy (212) 214-5070
John E. Silvia, Ph.D. Chief Economist (704) 410-3275 john.silvia@wellsfargo.com
Mark Vitner Senior Economist (704) 410-3277 mark.vitner@wellsfargo.com
Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 jay.bryson@wellsfargo.com
Sam Bullard Senior Economist (704) 410-3280 sam.bullard@wellsfargo.com
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Azhar Iqbal Econometrician (704) 410-3270 azhar.iqbal@wellsfargo.com
Tim Quinlan Senior Economist (704) 410-3283 tim.quinlan@wellsfargo.com
Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com
Sarah House Economist (704) 410-3282 sarah.house@wellsfargo.com
Michael A. Brown Economist (704) 410-3278 michael.a.brown@wellsfargo.com
Jamie Feik Economist (704) 410-3291 jamie.feik@wellsfargo.com
Erik Nelson Currency Strategist (212) 214-5652 erik.f.nelson@wellsfargo.com
Michael Pugliese Economic Analyst (704) 410-3156 michael.d.pugliese@wellsfargo.com
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