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Top States for Business

Texas and Florida hurt by the economic body blow from hurricanes Harvey and Irma

Key Points
  • Hurricanes Harvey and Irma could slow U.S. GDP 1% this year, dropping it to 2.8%, DS Economics predicts.
  • Texas, ranked No. 4 in 2017 America's Top States for Business, accounts for nearly 8% of U.S. economic output.
  • Florida's economy is about half the size of Texas' — but its range of industries, including tourism, ports, business services and health care, magnifies the impact from Irma.
  • Florida enjoyed the fifth best year-over-year job growth in the nation before Hurricane Irma hit the state.
  • Unemployment in both states has been tracking near or below the national average, leading to worker shortages even before the storms.
The economic cost of Hurricanes Harvey and Irma

Hurricanes Harvey and Irma not only devastated thousands of lives and destroyed billions of dollars' worth of property, they may also have done long-term damage to the competitiveness of two of America's most economically important states — Texas and Florida.

With a gross domestic product of $1.5 trillion dollars last year, Texas accounted for nearly 8 percent of total U.S. economic output, according to the Commerce Department's Bureau of Economic Analysis. Florida's economy is smaller — about half the size of Texas' — but its range of industries, including tourism, ports, business services and health care, magnifies the impact from Irma.

All told, economist Diane Swonk of DS Economics says the two storms — and the impact in the two states — could slow overall U.S. economic growth by a full percentage point this quarter, to 1.8 percent compared to projections of 2.8 percent growth before the storms. And while conventional wisdom suggests a corresponding boom once the states begin to rebuild, Swonk is not so sure that will be the case this time.

"You're putting a stress that we've never seen on an economy that already doesn't have labor and doesn't have materials," she said.

Unemployment in both states has been tracking near or below the national average, leading to worker shortages even before the storms. In Texas, where Hurricane Harvey began bearing down on the state in the final days of August, unemployment came in at 4.2 percent. In Florida, where preparations for Irma had not yet begun in August, unemployment was just 4 percent. And while natural disasters like hurricanes ultimately tend to increase the numbers of newly unemployed people available for rebuilding, Swonk says Florida and Texas are special cases.

"These are two places where you happen to have a disproportionate amount of illegal immigrants that do work in the workforce, they do work in construction, and they're sitting targets," she said, noting that Texas and Florida tend to take a harder stand on immigration than most states. If undocumented workers choose to avoid the states for fear of deportation, Swonk says, it could slow the recovery even more.

Add to that a shortage of building materials due to cuts in manufacturing capacity dating back to before the 2008 financial crisis, and the prospects become even more dire.

"It took eight years to rebuild Homestead (Florida) after Hurricane Andrew," Swonk said.

Harvey and Irma struck much larger areas, in states with very different but equally vital economic roles.

The Texas effect

In Houston, America's fourth-largest city, even people who were not directly affected by Harvey are still facing massive daily disruptions. Road closures persist on some of the area's major freeways, stretching 20-minute commutes into two hours, trying workers' patience and dampening productivity.

Other potential costs are more direct. On Monday, Houston Mayor Sylvester Turner said he would propose an emergency 8.9 percent increase in the city's property tax rate to deal with mounting storm-related costs.

For those directly affected by the storm, the will to rebuild is tempered by a shortage of available contractors and worries about getting ripped off.

Rosie Robledo was still sifting through her waterlogged belongings when we visited Houston's flooded South Belt neighborhood on Sept. 6, but she was already looking ahead to the rebuilding process and vowing to take it slowly.

Here's what Houston looked like before and after Hurricane Harvey hit

"Damage like this is a lot of money," she said. "You have to be careful with folks not on the straightaway. I would caution everyone else. This isn't $50 or $100. It's thousands we are putting up to fix our homes."

The situation is even worse in harder-hit cities, like Beaumont, Port Arthur and Corpus Christi. Meanwhile, the state's crucial energy and petrochemical industries are still working to get back to full strength. At the height of the storm, 20 Texas oil refineries were closed or partially shut down, taking out nearly one quarter of total U.S. refining capacity and temporarily throwing thousands of Texans out of work. And all of this comes at a pivotal time for a state that was already struggling to maintain its competitive edge.

Earlier this year, with the Texas economy uncharacteristically struggling due to falling energy prices, the state slipped to fourth place in CNBC's annual America's Top States for Business rankings. While the state still ranks high, it previously had never finished below second place. A major reason was deterioration in the state's finances. While still more solid than most states, Texas legislators struggled to pass a no-frills, $218 billion two-year budget earlier this year.

America's Top States for Business 2017

Before Harvey made landfall in Texas on Aug. 25, the state economy was starting to come back as oil prices stabilized. But as the storm slowly churned toward Houston, dumping epic amounts of rain, the gains of recent months washed away, putting state and local finances back on unstable ground.

"It's got regional implications for these areas in terms of the tax base, in terms of their ability to pay everything their tax base is going to be involved in," Swonk said.

And the same goes for Florida.

Florida's widespread damage

Tina Lux-Boim, co-founder and CEO of Boca Raton-based business-to-business software company MMI, considers herself and her company fortunate. All of her 48 U.S. employees are safe, and the business survived Hurricane Irma with no physical damage. But that is not to say that Irma did not have a major impact. Ahead of the storm, the company allowed employees to work staggered shifts in order to prepare their homes, and moved eight key employees out of harm's way in order to keep the business going. And that is where the productivity losses began.

"We lost two-and-a-half days of travel time between going up and back," Lux-Boim said.

That is in addition to Monday, when the storm began its long and devastating trek north. And while MMI's headquarters quickly got its power back, most of the employees had no power at home.

Now it is all about playing catch-up.

"We're behind on a project. There's chaos, actually, there today," she said.

While she is confident MMI will quickly make up the lost time and said customers have not experienced any disruptions, businesses elsewhere in the state may not be so lucky.

A woman exits a Miami store still without power two days after Hurricane Irma passed through the area on September 12, 2017.
Getty Images

It is not just the power outages and widespread storm damage. Irma came at one of the worst possible times for Florida's crucial $90 billion tourism industry.

"It looks like there are going to be some fairly large disruptions when you think about tourism," Swonk said, noting that now is the time families begin thinking about booking trips for Thanksgiving.

"People don't trust getting in there," Swonk said.

While MMI may have lost two or three days of productivity due to the storm, Lux-Boim fears her counterparts in the tourism industry will be dealing with Irma far longer.

"I think they'll be feeling it for two or three years," she said.

It all comes at a time when Florida had been flying high. The state finished 12th overall in the 2017 America's Top States for Business rankings. But its economy climbed to second place overall, thanks to solid growth, strong state finances and the fifth best year-over-year job growth in the nation. All of those could be under pressure in Irma's aftermath.

Damaged sail boats are shown in the aftermath of Hurricane Irma on September 11, 2017 in Key West, Florida.
Getty Images

Just as devastating to Florida's economy as the decline in tourism are losses to the state's citrus crop. Hurricane Irma caused losses of 50 percent to 70 percent of the state's citrus crop in portions of South Florida, according to a spokesperson for the Florida Fruit & Vegetable Association. Last year the value from Florida citrus was $1 billion. Florida ranks second in orange juice production to Brazil.

Shifting landscape

Were the storms powerful enough to hurt the states' competitive position? That will depend on how prolonged the recovery proves to be.

Both states remain powerhouses with economies built to last, and no one is predicting the storms will throw either Texas or Florida into recession.

But Swonk says the storms do highlight one aspect of competitiveness: the impact of climate change. And she says it has nothing to do with politics.

"Whether you believe in climate change or not, companies believe in climate change. And they factor it into supply chains. They factor it into where they locate," she said. "Individuals do as well. And the cost of flood insurance matters."

That means the long-term economic impact of the storms may well depend on the impact in the coming weeks and months.

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