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US economy takes big hit

Hurricane Katrina is not likely to trigger a recession, but oil disruption hurts.

As devastating storms go, hurricane Katrina has packed an unusually big punch to the United States economy.

Though the full impact of the Aug. 29 superstorm is still being assessed, the economic brunt differs in at least three major ways from a typical recovery led by armies of insurance adjusters bearing clipboards and checkbooks.

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• A region's major city has been entirely displaced, throwing hundreds of thousands of people out of work and casting doubt on the financial future of New Orleans itself.

• The movement of goods through America's heartland has been disrupted, with key ports still closed and the channel of the Mississippi narrowed by the storm.

• Oil and gas drilling platforms, refineries, and pipelines are damaged, and some will take months to bring back on line.

The result is a barrage of challenges likely to affect everything from the US unemployment rate to winter heating costs for months to come. The typical forecast now is for slowing growth rather than outright recession.

With unprecedented prices at gasoline pumps and an unprecedented humanitarian crisis fast rippling outward, the deeper worry is that Katrina's aftereffects could erode consumer confidence.

"That's what we're very concerned about," says Robert Dye of Economy.com. "This is really an unprecedented event."

American consumers have consistently surprised economists in recent years with their buoyancy amid rising debts and difficult job markets. That could happen again, but evidence was mounting even before Katrina that consumer confidence may be weakening in the face of high gasoline prices. The red-hot housing market shows signs of cooling, for example, as "for sale" signs stay up longer in some cities and demand for home mortgages shrinks.

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"Consumers are unlikely to be able to rely on their homes for a ready source of cash," as they have in the recent past, concludes Gina Martin, an analyst with Wachovia, a bank based in Charlotte, N.C. This, coupled with "out of gas" signs at service stations, could prompt a pullback in consumer spending, but not a sustained decline, she predicts.

The prevailing view now is that Katrina will curb the nation's economic growth - which has been running at an annualized rate of more than 3 percent - by perhaps 0.5 percent in the second half of 2005. Then, the economy could get a Katrina stimulus, as rebuilding gets under way in earnest early in the new year.

Still, for now, the storm's shock remains significant and unpredictable, given the magnitude of job losses and the damage to industrial infrastructure.

In the Gulf region, where the effects are concentrated, the human impact begins with a death toll expected to be in the thousands. Countless survivors in one of the nation's poorest regions now face a future with uncertain job prospects and no earthly belongings. Insurance payouts, which eventually may reach $25 billion by some forecasts, will cover only part of the storm's damage.

"In our preliminary analysis, employment levels will not be back to pre- hurricane levels for another six to seven years" in New Orleans, says Mr. Dye.

The city, ranked ninth lowest in the US in median income, faces a twin challenge: Its labor force is now almost totally absent, and the city was already struggling economically before Katrina.

To be sure, many residents will return, eager to revive the cacophony of jazz and jambalaya. But it's also safe to assume that a number of businesses will never reopen - or will relocate for good, Dye says.

The now-displaced labor force, too, "will want to start working as soon as possible," he says, even if it's in Memphis rather than Metairie.

A silver lining, for these workers, is that the national job market has been improving in recent months. Still, their migration onto jobless rolls could yield somber national job reports for several months, predicts economist Nariman Behravesh of Global Insight in Lexington, Mass.

Ripples from Katrina have hit far inland as well, as a disruption of shipping impedes the flow of goods up and down one of the world's most important rivers. Some 60 percent of US grain exports flow down the Mississippi, while imports, from steel to tropical fruits, travel upstream.

The Port of New Orleans, usually one of the nation's busiest, has been scrambling to restore electricity, putting out an urgent call Monday for diesel fuel to run generators. The Mississippi is now open to ships with a draft of 35 feet or less during daylight hours, but it is unclear how soon full-scale traffic will resume.

"It's a major disruption and it's going to continue for a while," says Jerry McReynolds, president of the Kansas Association of Wheat Growers.

Growers in his state, already coping with a six-year drought, now face falling prices for their product, because of the uncertainty about how to ship it to foreign customers. At the same time, Mr. McReynolds says, "Our fuel costs have skyrocketed."

Indeed, it is via energy costs that Katrina reaches into the pocketbook of every American.

Foreign governments have moved to open international reserves, to ease the burden of slowed US oil production. That has helped stabilize crude oil prices below $70 a barrel for now.

From pipelines to refineries, much of Louisiana's energy infrastructure appears to be coming back quickly. But four refineries - representing 5 percent of US capacity - could be off-line for weeks or longer, so the price of gasoline, jet fuel, and other refined products may spike higher than crude-oil prices suggest.

"You don't burn a barrel of oil," says John Tobin of the Energy Literacy Project. "You burn the products that it makes."

Even at $70, the price of oil reflects a new dynamic of tight supply worldwide. Supplies, as a sum of commercial stocks, strategic reserves, and excess capacity, "are going to be at their lowest levels in history by next week," says A.F. Alhajji, an oil expert at Ohio Northern University in Ada.

The ability to transport oil and natural gas from offshore rigs is also impaired.

"Prices are going up," Dr. Alhajji says. "Or at least they will stay high."