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Wednesday, September 7, 2005 - Page updated at 12:00 AM

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Storm poses an array of economic challenges

The Christian Science Monitor

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:

• 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 U.S. 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.

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.

"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.

But 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 economy.com's Robert Dye.

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

The now-displaced labor force "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.

It is through 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 U.S. 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 U.S. capacity — could be offline 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," Alhajji says. "Or at least they will stay high."

Copyright © 2005 The Seattle Times Company

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