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Wednesday, August 31, 2005

The Economic Consequences of Hurricane Katrina

The situation in New Orleans has, very sadly, deteriorated since this was posted here yesterday touching on a few of the short-run and longer run economic consequences of Hurricane Katrina.  There has been quite a bit written about the impact of the hurricane on oil prices and the resulting economic consequences, but not as much has been written on how the disruption to the lower Mississippi transportation network will affect the supply chain and the economy.  This article in the LA Times has more details on this than other accounts I have seen.  The effects on the economy in both the short-run and long-run are still being assessed, and the negative impact from this disruption is a key part of that calculation.

The economists in this report predict a decline in economic growth in the short-run, but a rebound in the longer run when rebuilding and restocking begins.  I will focus on the damage to the lower Mississippi transportation network and the general short and long-run effects in the remarks below.  The full article also details other effects such as those on oil prices, fisheries, tourism, and so on:

Hurricane Is Felt on Many Fronts. by James S. Granelli, LA Times: Hurricane Katrina's most noticeable effect on American pocketbooks may be $3-a-gallon gasoline, but the devastation it caused to New Orleans and the Gulf Coast is likely to affect the U.S. economy in less obvious ways. … The Gulf of Mexico produces about a quarter of the nation's oil and natural gas, and several major gasoline refineries are nearby. The city's port is a key entryway for bulk commodities, such as coffee and steel, and an outlet for grain exports from the nation's heartland. Moreover, New Orleans is a major hub in the Gulf Coast's rail and highway network, ... Now much of that is in disarray. "They need to make sure that trade and commerce continues to flow," said John Silvia, an economist at Wachovia Bank in Charlotte, N.C.

Although it is too early to measure the full effect of the storm on the U.S. economy … The biggest effect on the nation's economy is expected on the energy front. ... But the effect reaches much deeper than energy prices. Katrina hit area seaports hard. New Orleans had been looking to the newly opened $100-million Napoleon Avenue Container Terminal to compete with Houston and other ports. … The Port of New Orleans connects with many different forms of transport, including all six major U.S. railroads and barges operating on the Mississippi River. It is the largest source for seaborne imports of coffee, natural rubber and steel, according to port statistics. ... In Gulfport, Miss., warehouses and much of the pier structure appear to be gone ... Gulfport is a major point of export for fruit and frozen chicken ... In addition, Alabama lumber products firms could be hurt especially hard. Chiquita Brands International Inc., one of the world's largest banana producers, said it suspended shipments because of damage to its facilities at Gulfport. The company … said it would divert those shipments to facilities in South Florida and Texas until its Mississippi facilities were repaired. Steel imported at New Orleans … will probably head to Houston now, where inland transport could cost four times as much ... Railroads will suffer in the short term ... Economist Silvia said eastbound trains were being stopped at Houston, and westbound ones were being stopped at Memphis, Tenn., and Atlanta. … Century City-based Northrop Grumman Corp. said its shipbuilding facilities along the Gulf Coast were hit with the "full force" of the hurricane, although most ships under construction appeared to have escaped major damage, the company said. …

On a longer-term basis, however, retailers of staple goods — food, clothing and household items — are likely to see a surge in sales as consumers work to replace necessities that were lost, said Jerry Hirshberg, a retail analyst at Standard & Poor's in New York. "There is going to be a lot of catch-up buying and restocking," he said. The construction industry is a probable beneficiary, but not right away, said Gary Schlossberg, senior economist at Wells Fargo Capital Markets in San Francisco. Home builders and reconstruction supply firms are among the companies that will see a surge in business once rebuilding gets underway, but that can often take months, Schlossberg said. The trucking industry also will gain from rebuilding, and trucking companies will probably show a net benefit, as long as fuel prices come down, A.G. Edwards transportation analyst Donald Broughton said…

[UpdateThis report from CNN Money indicates oil will be released from the Strategic Petroleum Reserve.]

[Update:  White House adviser Bernanke discusses the economic consequences of Katrina.]

Note:  Daily coverage of the economic consequences of Katrina can be found on the main blog page.

    Posted by on Wednesday, August 31, 2005 at 03:24 AM in Economics | Permalink  TrackBack (2)  Comments (3)

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    » The Economic (let alone human) Costs of Katrina from Hatful of Hollow

    Mark Thoma at Economist's View notes the economic ramifications of Katrina, not only on oil and gasoline markets, but also because of the significant disruption to Mississippi and Louisiana transportation networks. Just one look at the bridge across Po... [Read More]

    Tracked on Wednesday, August 31, 2005 at 06:30 AM

    » The Economic (let alone human) Costs of Katrina from Hatful of Hollow

    Mark Thoma at Economist's View notes the economic ramifications of Katrina, not only on oil and gasoline markets, but also because of the significant disruption to Mississippi and Louisiana transportation networks. Just one look at the bridge across Po... [Read More]

    Tracked on Wednesday, August 31, 2005 at 06:37 AM


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