Even as Hurricane Ida leaves a trail of disrupted lives, destroyed homes and shattered communities in its wake, the Category 4 storm will in the end most likely have a modest impact on overall U.S. economic activity.
The disruption to economic activity will result in a 0.2% drag on American gross domestic product in this quarter.
In our estimation, the disruption to economic activity, including higher energy prices, supply chain disruptions and extensive property damage, will result in a 0.2% drag on American gross domestic product in this quarter that will then be made up as rebuilding takes place in the final quarter of this year and the first quarter of next year.
That estimate, though, does not adequately capture the human costs caused by the storm in terms of displaced people and damage to homes, schools and communities. Hundreds of thousands have been left without power as rising waters have inundated the region.
But with one loss of life reported by early Monday and an orderly flow of people seeking shelter into Texas and throughout the Southeast, what could have been greater human tragedy has been avoided.
The storm will require dedicated aid from the federal government to jump-start the rebuilding in Louisiana, Mississippi, Alabama and elsewhere in the aftermath of the storm. This aid will come on top of the demands of a region already struggling with the resurgence of COVID-19,
National economic impact
At this point, the storm appears to be a large insurance event and not a repeat of the more significant economic disruptions that followed Hurricanes Katrina and Rita 16 years ago. Those storms, both Category 5, caused more than 1,800 deaths and 120 deaths, respectively, and many billions in damage.
We expect that economic losses will be near $16 billion with risk of much larger costs should flooding, winds and damage to regional energy infrastructure result in a much greater supply chain disruption than we currently estimate. But once rebuilding begins, and because of the way gross domestic product is measured, we expect GDP losses will be smaller and range somewhere between $3.7 billion and $7.4 billion.
If the levees around New Orleans do not hold or there is much more substantial property damage or disruption and damage to critical energy infrastructure in the Gulf, then the economic losses could roughly double to $30 billion.
Federal Reserve
The temporary disruption of economic activity should not alter the direction of Federal Reserve monetary policy. While the central bank is currently considering links between climate shock, financial conditions and monetary policy, at this time those linkages are not well understood and the severity of this particular episode does not warrant a change in the Fed’s policy or an increase in the pace of asset purchases.
The impact will on regional hiring will appear in the September jobs report, which will be released on Oct. 2, and not in the August employment estimate to be published on Sept. 3. The weekly jobless claims data for the weeks ending Sept. 3 and Sept. 10 will most likely capture the impact of the Hurricane Ida and reflect the increase in people filing for unemployment insurance.
A seven-day shutdown of economic activity, which is our baseline estimate of the storm’s toll, would result in a loss of roughly $2.7 billion in real GDP in Louisiana and $500 million in both Alabama and Mississippi each. If the storm ends up being more destructive, and results in economic activity being partially disrupted for three weeks, then we would anticipate that those estimates would double at a minimum.
CoreLogic, a provider of real estate data, estimates that about 1 million homes are at risk, with a potential of $220 billion of damage. But that is clearly a worst-case scenario assuming 100% destruction of all homes. At this point, that does not reflect what is happening on the ground in the region.
Perhaps a more realistic estimate would be to assume that 5% of the regional housing stock at risk to the storm is damaged, which would result in roughly $11 billion in damage.
It is challenging to estimate the cost of flooding. After Katrina, the levee system has been significantly overhauled. Whatever the case, this hurricane will be another test for the state’s strained infrastructure, which is in dire need for more funding to deal with future hurricanes that seem to be more and more frequent.
The current infrastructure bill sitting before Congress adds $47 billion for resiliency that will go in part to rebuild Louisiana’s eroded coastlines and waterways and $73 billion for critical energy infrastructure improvements.
Critical infrastructure
It is also important to note that the Gulf region produces about 15% of the nation’s oil and 5% of its natural gas, according to the U.S. Energy Information Administration. The landfall area of Hurricane Ida in Louisiana is the focal point of supplies for Gulf of Mexico oil platforms that have been shut down — which amounts to about 1.85 million barrels of oil and 2.7 billion cubic feet of natural gas per day.
Refineries in Louisiana process about 3.5 million barrels of crude oil a day, which is about 40% of the Gulf Coast’s total, with Texas accounting for the rest. Louisiana accounts for about 19% of the nation’s overall refinery capacity.
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As of Monday morning, roughly 96% of crude oil production and 94% of natural gas production have been shut down in the Gulf, with roughly 12% of refining capacity affected. Wholesale gasoline futures imply that the national price of gasoline will most likely increase 5% in coming days.
Energy, oil and gasoline
The Gulf Coast is home to much of the nation’s critical energy infrastructure, with offshore wells accounting for 17% of crude oil production and 5% of natural gas production. In addition, more than 45% of the nation’s refining capacity lies along the Gulf Coast, according to Bloomberg, making it a critical part of the national energy infrastructure and supply chain.
Louisiana accounts for 13% of the nation’s total operable refining capacity. A hurricane’s impact on this crucial piece of the national energy puzzle can cause a ripple effect throughout the energy supply chain, from shutting production and pipeline operations, and evacuating platforms.
We expect that disruption linked to offshore crude production, based on U.S. Energy Information Administration data, will be close to 1.6 million barrels per day, or roughly $154 million per day, and offshore natural gas production of 2.7 billion of cubic feet a day, or $12 million per day.
The refinery and offshore platform shutdowns should not cause immediate supply issues. For the week ending Aug. 21, Gulf Coast stocks of gasoline and distillate were 3% and 5% above the seasonal five-year average. Gulf Coast stocks of crude oil were essentially in line with the five-year average (not including the Strategic Petroleum Reserve), according to the Department of Energy.
But natural gas storage is 6.2% below the five-year average level. Weekly U.S. total stocks for crude oil and petroleum product are below the five-year average
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