As the flood waters in Houston recede, and residents face the emotional and grueling process of rebuilding their lives, attention in the financial markets turns to the economic impact of Harvey – both short- and long term. Hurricane Katrina and Super Storm Sandy are two recent examples of devastating storms, and it’s important to apply the relevant learning from these events, while also understanding how Harvey’s economic legacy will differ. The following insights from Cambridge Trust’s Wealth Management Investment Team provide some context and perspective on the financial and economic outlook for Houston and the U.S. economy.
The Macro View
Maureen Kelliher points out that the impact of Hurricane Harvey will be different than Katrina in a number of ways, and will not have a major impact on the national economy.
- First and foremost, the human toll will be much different. Thankfully, the total number of human lives lost (Harvey vs. Katrina) will be much lower, and the timing for family displacements likely will not be as long. The general consensus is that emergency services and first responsers were more organized for Harvey, which should enable disaster recovery to commence sooner.
- The cost to insurers for Harvey is estimated to be between $20 billion and $50 billion thus far, whereas Katrina cost insurers $150 billion.
- Federal vs. State impact. Separating the responsible parties for dealing with issues provides a great deal of context and perspective. It's important to remember that flood insurance and repairs related to floods are generally a federal responsibility and do not fall to states or cities.
Observations on the local/regional economic impact include:
- The Texas economy represents less than 10% of the national economy (approximately 8.5 percent) and, as such, Hurricane Harvey is not expected to have a significant impact on the overall U.S. economy.
- Impact to the Texas and the national economies is likely to be short-term negative but long-term positive. Katrina was slightly negative short-term but positive for the housing industry long-term.
- Flooding was severe, but limited power outages will allow companies and business to recover quickly. The greatest impact will be felt in the energy industry.
- The most severe economic impact to Houston will be from the port, which contributes approximately $345 million daily to the city’s economy. And although Houston is the largest energy port in the country, the city’s economy is diverse, thereby providing some relief to the toll on the local energy industry.
- There was/will be limited disruption to oil production. The major impact was to large oil refineries that flooded (4 million gallons/day or 23% of U.S. capacity scuttled). With refineries down, gasoline prices are likely to rise, but most likely only temporarily.
Municipal Bonds Perspective
Eric Jussaume reports that as of September 1, there had been very little trading activity in municipal bonds issued in the areas affected by Hurricane Harvey. Bonds that did trade showed no levels of distress compared to similarly rated credits. This trend reflects bond market activity following Hurricane Katrina and Superstorm Sandy. The assurance of Federal aid in helping to rebuild and restore communities puts less pressure on state and local budgets.
- To provide perspective on the size of the bond market in greater Houston, it’s important to consider that the amount of outstanding municipal debt in Harris County, Texas, where Houston is located, is approximately $67 billion. This includes bonds issued for hospitals, schools, water districts and other projects affected by the hurricane.
- According to Moody’s Investor Services, a natural disaster hasn’t caused a single default by a municipal borrower that they rate. Although there exists the potential for downgrades, especially for Municipal Utility Districts, where the debt is repaid through property taxes as well as water and sewer revenues, expectations are for limited market impact.
- Watching for opportunity. We continue to monitor the municipal market closely and would use meaningful decreases in bond prices in the affected areas as an opportunity to increase our exposure (as opposed to a selling opportunity).
What does this mean for Cambridge Trust Clients?
Closer to home, Lindsey Donovan shares her strategic perspective with regard to Cambridge Trust Company’s position relative to the financial impact of Hurricane Harvey.
- Across our portfolios Cambridge Trust Company has small holdings of Houston metropolitan area municipal debt. Approximately half is tied to local GOs (government debt), essential services, the Port Authority of Houston, and transportation bonds, as well as debt issued by the University of Houston.
- The remainder is invested in PSF (Permanent School Fund) guaranteed bonds. These bonds are issued by local independent school districts in Texas and are backed by the PSF, an appropriation fund currently valued at ~$30 billion, which is backed by land guarantees and mineral rights.
- Approximately half of the bonds we own that are invested in Houston proper are pre-refunded and backed by a combination of agencies, U.S. Treasuries, or state and local government funds.
- All of the credits carry strong ratings of AA/Aa3 or better by either S&P or Moody’s.
While the long-term impact of Harvey remains unclear on municipal credits, in the near term we do not have any plans to move out of our positions in the Houston area. If spreads were to widen, we would view this as a potential opportunity to expand our current positions. This is a fluid situation and highly dependent on new information out of Houston. For example, if credit metrics were to turn negative, we would re-evaluate our position.
We know that the aftermath of Harvey will be felt for years by the residents of greater Houston who were directly affected, and we wish them well. Just as the residents will persevere through the challenges presented by Harvey, the local and national economies will demonstrate resilience as they have in the wake of other – even larger – natural disasters.
If you are interested in speaking with a Cambridge Trust Client Advisor about this piece or any aspect of the economy, please don’t hesitate to reach out to our Wealth Management team led by Executive Vice President and Head of Wealth Management, Jennifer Pline (CFA). We’re always here to share financial insight, especially with regard to your specific situation.
Contributors to this article include:
Maureen Kelliher, CFA
SVP and Investment Officer
Wealth Management, Cambridge Trust Company of New Hampshire
Eric C. Jussaume
Senior Vice President and Portfolio Manager
Wealth Management, Cambridge Trust Company
Trader and Research Analyst
Wealth Management, Cambridge Trust Company