Economic Effect of Hurricane Katrina on the Economy

Economic Effect of Hurricane Katrina on the Economy and Manufacturing

The states most-directly impacted, Louisiana, Alabama and Mississippi, are relatively small shares of the national economy, ranking 24th, 25th and 35th nationally in terms of Gross State Product.

·  Collectively they account for 3.1% of U.S. GDP, equal to the size of Michigan.

·  These states account for 3.4% of manufacturing output.

With Respect to International Trade:

Exports. The New Orleans District exported close to $37 billion of goods in 2004. The majority is agriculture.

•  5% of total exports

•  3.5% of manufacturing exports

•  25% of agricultural exports (62% of total soybean and corn exports pass through the New Orleans District.)

Imports. The New Orleans District handled $79 billion of imports in 2004, $32 million of which is petroleum (this translates to over 18% of total petroleum import supply).

·  5 percent of goods imports

·  3.8 percent of manufactured imports

·  Some high concentrations

Computer imports: 9% of US shipments

Iron and steel: 6% of US shipments

Economy before Katrina 2004.2 to 2005.2 (Percent Change)

Gross Domestic Product 3.6

Consumer Spending 3.8

Business Investment 9.1

Exports 8.3

Imports 5.9

Corporate Profits 18% (Cash flow = 13.5% of Bus. GDP in 2005.2)

Inflation 2.8

(ex food & energy) 2.3

Manufacturing before Katrina. Production is at an all time high.

Excluding high tech, manufacturing production is still 1% below April 2000 peak.

2004.2 to 2005.2 (Percent Change)

Production 3.3

Productivity 4.6

Employment -73,000 to 14.4 million

Impact on the Economy and Manufacturing. Hurricane Katrina is expected to slow economic growth to 3.3 percent (SAAR) in the second half of 2005. This is 18 percent slower than the pre-Katrina expectation of 4 percent growth in the second half. For the year overall, GDP will increase by 3.4 percent, 10% slower than the 3.8 percent pre-Katrina expectation.

The displacement of hundreds of thousands of residents of the gulf-coast states as well as higher energy prices (which eats into consumers’ disposable incomes) will cut deeply into consumer spending in September (the last month of the third quarter) and later in the fourth quarter (see table to the right).

Slower consumer and business investment spending and some supply disruptions will also slowdown the expected up-turn in business inventories in the second half of the year.

As a result, manufacturing output will grow slower (3.1 percent) in the second half than the 5.1 percent pre-Katrina baseline.

Then, reconstruction efforts in the fist half of 2006 (particularly in the first quarter) will create a boomerang effect for the economy and for manufacturing, both of which will not only accelerate, but grow faster than in the pre-Katrina scenario.

In 2006, GDP is expected to increase by 3.8 percent and manufacturing output by 5.2 percent.

Inflation. The CPI will likely increase by close to 6 percent in the third quarter from higher energy prices. However, as supply comes back on line, the inflation rate is expected to slow to 2.7 percent in the 4th quarter and increase just 2 percent in 2006.

Employment. Slower economic growth and dislocations will reduce the level of employment by 300,000 in the second half of the year. The lion share of this will be in the 4th quarter. This is based on the assumption that 50 percent of those displaced by Hurricane Katrina are either relocated to other locations by national companies or will find work in other areas outside the gulf coast.

Increased economic growth in 2006 from reconstruction efforts is expected to offset the job losses that took place in the second half of 2005.