Hurricane Florence: Bracing for Impact

Less than two weeks into the second half of the 2018 Atlantic hurricane season (which runs from June 1 to November 30), Hurricane Florence is the first major hurricane to threaten the U.S. mainland. As the east coast of the United States braces for landfall, in the Carolinas, residents and observers alike are hoping that 2018 isn’t a repeat of the disastrous 2017 season.

At this time last year, the continental U.S. had already witnessed  destruction from two Category 4 hurricanes: Harvey, which made landfall in Texas, and Irma, which struck in Florida. The 2017 Atlantic hurricane season featured 17 named storms, 10 hurricanes, and six major hurricanes, making it one of the most active seasons on record. With storms that ravaged the Caribbean, Central America and North America, the 2017 season was also one of the deadliest and costliest in recent memory.

With damage estimated at $125 billion, 2017’s hurricane Harvey is tied with 2005’s hurricane Katrina as the costliest Atlantic hurricane on record (note that data is not inflation-adjusted). While Harvey made landfall in Texas as a Category 4 storm with maximum winds of 130 mph, the storm quickly weakened, stalling over the state, and dumping 60 inches of rain in some areas. Weather forecasters fear the same thing will occur in the Carolinas with Florence; the slow-moving storm could drop up to 40 inches of rain in the areas affected.

Economic Impact of Hurricanes

The economic impact of hurricanes has three stages: before, during, and after the storm. Before the storm, there is a flurry of economic activity as consumers and businesses stock up on food, batteries, and generators, secure structures and purchase fuel for evacuation or to power homes. Once the storm hits, economic activity slows as those affected wait it out. While the first two stages usually come and go very quickly, the post-storm cleanup and rebuilding process can continue for months.

As Florence approaches, we are seeing higher stock prices for companies that stand to benefit from both pre- and post-hurricane purchases. While the S&P 500 is down slightly over the last two weeks, the prices of Costco (warehouse retail), Generac (generators), Home Depot (home improvement retail), and Lowe’s (home improvement retail) have jumped in recent days. Lowe’s already had a strong price appreciation following its August 22 positive earnings announcement, but the stock has gotten a second boost on storm news. Headquartered in Mooresville, North Carolina, Lowe’s has a strong presence in both North and South Carolina, where Florence is expected to make landfall.

We’re also seeing Florence’s impacts on energy markets. According to the U.S. Energy Information Administration, “The largest potential threat to petroleum supplies in this region is the risk of disrupted pipeline operations because of power outages or flood-related damage to pumps.” These pipeline concerns have pushed the price of West Texas Intermediate crude back above $70 per barrel for the first time since late July. While the media is reporting there are rising gasoline prices and shortages in the evacuation zones, we’re not seeing those price jumps at the national level yet.

As we saw with hurricane Harvey a year ago, most of the damage from large, slow-moving storms like Florence are not from the winds, but from the flooding. This changes the post-hurricane recovery scenario. For example, in Texas, flooding destroyed thousands of vehicles. As a result, we saw a surge in truck sales in the last few months of 2017, since the state of Texas tends to lead the country in pickup truck purchases. We’ve also seen a surge in construction activity in the year since Harvey. As of July, Texas employment in construction is up 8.1% from a year ago; this compares to a year-over-year growth rate of 4.4% nationally (July/July).

As residents heed mandatory evacuations in Florence’s projected path, there is little comfort in the fact that the National Oceanic and Atmospheric Administration (NOAA) predicts that the 2018 Atlantic hurricane season will be “below-normal.” Hurricane researchers at Colorado State University echo this forecast. We have only seen 10 named storms so far (subtropical storm Joyce just formed on September 12), but there are still two and a half more months of hurricane season to endure.