- The Washington Times - Thursday, September 1, 2005

Hurricane Katrina delivered a wallop to the U.S. economy by wiping out large chunks of the transportation, energy and communications infrastructure, and leaving thousands of people idle and homeless.

The possibilities range from a recession, which could happen if the severe disruptions result in a horrific spike in oil and gasoline prices, to a long sluggish period over the fall and winter followed by a probable spring snapback as the Gulf region starts to rebuild.

“Katrina is shaping up to be the nation’s costliest hurricane,” said Mark Zandi of Economy.com. “Magnifying its economic impact are the large population affected, the disruption to the region’s seaports and the damage to the Gulf of Mexico’s large energy infrastructure.”

About one-third of the energy the Washington area and the nation uses to run its cars and trucks, heat and cool its homes and even power its computers and telephones runs through the Gulf Coast’s pipelines and ports.

In addition, the Gulf region produces more than one-tenth, or $130 billion, of the nation’s economic output each year, and hosts one-fifth, or $150 billion, of the cargo shipped in and out of the U.S. About half of the nation’s grain, corn and soybean exports go through the Mississippi River ports.

While the devastation to the vast oil and gas operations in and surrounding the Gulf still is not quantified, the Coast Guard describes it as “catastrophic.”

Already, it has driven oil and gas prices to record highs and caused shortages of gas, jet fuel and other products in a smattering of areas such as Atlanta that are heavily dependent on Gulf shipments.

Moreover, September is the most active hurricane month in the U.S., and it has just begun. Hurricane Ivan, a lesser storm than Katrina that hit the Gulf last September, caused damage to oil rigs and pipelines that took almost a year to repair.

“The best that can be expected is a month or two of weaker job and income growth, higher unemployment, and softer production and construction activity,” said Mr. Zandi, with the hope that an early start to rebuilding will help revive growth this fall.

“This storm will impose much larger losses than previous hurricanes and floods” because of the months of delay in rebuilding caused by the flooding and evacuation of New Orleans and surrounding areas, said Peter Morici, a business professor at the University of Maryland.

“The economic consequences of the loss of the port of New Orleans will be greatly compounded by the loss of east-west transportation routes” across the Mississippi, handicapping manufacturers and producers throughout the South, he said. “Multiplier effects in the services sector will be considerable.”

Most economists don’t like to predict or even talk about the worst that can happen, but all are mindful that spikes in oil and gas prices have been implicated in all U.S. recessions since the 1970s.

Part of the reason is the sheer shock of skyrocketing gas prices, which force people to forgo spending in other areas. And partly it’s the psychological impact on consumers, who even before the storm rated high pump prices as their top economic concern.

The storm as of yesterday had forced up average gasoline prices nationwide by 55 cents to $2.99 a gallon, but “it is clear the sharp uptick in prices is just beginning,” said energy analyst Thorsten Fischer. “Hurricane Katrina has thrown the U.S. energy industry into chaos and the repercussions will be felt on a global scale.”

Some of the shortfall in gas and heating oil can be made up by imports from Europe through Northeastern ports, but that relief is still weeks away, he said.

President Bush met with Federal Reserve Chairman Alan Greenspan yesterday and said they view the disruptions as “temporary.”

David Rosenberg, a Merrill Lynch economist, said he expects high energy prices to roughly cancel out the increased economic activity from rebuilding.

Economists take comfort in the fact that, by all measures, the economy was doing well immediately before the storm, weathering a steep climb in gas and oil prices in August. Growth was averaging a solid 3.5 percent, and job and income gains were the healthiest in years.

Manufacturers, which are heavy users of oil, were growing moderately before the storm, said Daniel Meckstroth, an economist for the Manufacturers Alliance.

But now he expects growth to decelerate in the face of sharply higher prices and a likely pullback by consumers forced to spend more at the pump. The high fuel prices already are worsening the financial problems of ailing U.S. airlines and auto manufacturers.

Terry Francl, an economist at the American Farm Bureau Federation, estimates farmers will suffer at least $1.5 billion in losses of livestock, crops and exports as a result of the storm.

One sector that actually got a boost from Katrina is housing, where higher interest rates had been threatening to cut short a five-year boom. Interest rates have plunged since Monday as investors anticipate that uncertainty about the economic impact of the storm will force a halt to rate increases by the Fed.

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