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Thread ID: 19996 | Posts: 1 | Started: 2005-09-04
2005-09-04 13:24 | User Profile
KATRINA: THE AFTERMATH: THE ECONOMY: Risk of recession increases Michael E. Kanell - Staff Sunday, September 4, 2005
This hurricane was different --- and its impact will be, too.
Coming when it does, with debt-ridden consumers astride a wobbly economy, could this hurricane represent a tipping point --- a moment of truth for American confidence and the American economy?
As efforts at rescue shift to recovery and rebuilding, a picture will emerge of the hurricane's effect on America and its economy. But that portrait will almost certainly be different from the snapshots from other disasters.
A disaster's drag on the economy is less noticeable when things are picking up than when it joins other burdens to accelerate a slowdown. And unfortunately, Katrina came when an increasing number of economists said the nearly 4-year-old recovery was turning hesitant.
What had been the most costly hurricane in history, Andrew in 1992, hit as the economy was gradually pulling itself out of recession. Growth was slow, but the direction was up --- so Andrew's costs pulled against the trend.
Not this time.
"If anything, the economy had already peaked and was starting to slow," said economist Kashif Mansori of Colby College in Maine. "This could be giving it a push. This hurricane is contributing to the pre-existing momentum."
Moreover, American confidence had already absorbed a series of blows. There were setbacks in Iraq and, at home, higher energy costs and rising interest rates. The American savings rate last month was negative --- a sign that household incomes weren't keeping pace with expenses.
Experts were already worried about cutbacks in spending by consumers, who account for 70 percent of the economy. Let them retreat, and the housing market --- the economy's mainstay for three years --- could implode. Still, only the most pessimistic predicted that the nation would be pulled into recession.
Then came Katrina.
Experts this week debated whether the impact will drive the national economy into a rut. But no one liked the timing.
"What strikes me about this, is that it really came at a point where people seemed on edge," Mansori said. "The biggest impact is psychological."
A new energy crisis
But the damage was to pocketbooks as well as psyches.
Under Katrina's pounding, oil production was cut off, while many refineries were damaged. That meant shortages and price boosts in both oil and gas.
Other hurricanes have hammered oil and gas. Some, like Ivan last year, have pushed prices higher.
But the oil market is tighter than in decades, with the capacity of oil producers barely ahead of world consumption. Every disruption in supply threatens the delicate balance and pushes prices higher.
This week, prices leaped to all-time highs.
Adjusted for inflation, energy is not as expensive as in the early 1980s, but households will spend dramatically more on gasoline. Oil prices have risen about 220 percent since the recession ended in late 2001, said Robert Brusca, chief economist of Fact and Opinion Economics. Worse were this week's gas shortages, which were exacerbated by drivers rushing to fill up.
The lack of a vital commodity is more disruptive to companies and consumers than higher prices. Suddenly, you may have trouble doing business at all. And if supply is uncertain, how can you plan?
So, a supply shock --- inadequate supply --- is more damaging to the economic system than high prices.
Katrina gave us both.
Stricken in a vital spot
New Orleans was a conduit for more than oil.
The city's port is one of the nation's busiest --- handling traffic from around the world, as well as from deep in the American heartland.
Measured in dollars, the port is among the nation's top dozen. Measured in quantity of goods, it is in the top five.The port is responsible for more than 107,000 jobs.
With the port shut, importers and exporters were forced to scramble for alternative routes. That threatened to layer inefficiency on a range of products, from coffee to grain. And that could juice up inflation as longer, more expensive itineraries force businesses to either raise prices or accept lower profits.
The quicker the port is back in full operation, the less the economic damage.
People thrown adrift
But as critical as it is, the port is just a small part of the Gulf Coast's economy. No one knows exactly how many people have been killed or just displaced by the storm, but the storm did awful damage.
Louisiana has about 1.92 million jobs --- or it did, according to the Bureau of Labor Statistics.
How many of those people have lost jobs? How many went --- in one day's howling gusts and savage waters --- from workers to wageless refugees? Many lost not just paychecks but everything they owned. That is a lethal combination --- the lost of both wealth and income, economists said.
"This has to outweigh whatever positive spending there is," said economist Steven Kyle of Cornell University. "There has been a complete erasing of the local economy. There has been nothing like this before."
Efforts to feed --- and find --- victims of the storm continue five days after Katrina made landfall. In contrast, within a few days of most hurricanes, rebuilding has begun.
This one leaves scars
For years, the conventional wisdom has been that disasters are a short-term economic wound that heals quickly. Wealth is lost, but economic activity can be frenetic. Money pours in --- loans, insurance payments, government assistance --- and within a few months, area incomes leap.
Why not the same now?
A building boom along the coast is inevitable. Thousands of homes, buildings, bridges and roads must be rebuilt or repaired.
Hurricane Hugo's 1989 assault on the South Carolina coast cost roughly $12 billion in today's dollars, according to economist Doug Woodward of the University of South Carolina. But the region quickly bounced back, with economic growth climbing within a quarter, he said.
Katrina's desruction is vastly larger: Risk Management Solutions puts the losses at a stunning $100 billion.
Unlike with Hugo, where most business resumed within a week or two, Katrina's costs will continue to weigh down the economy for months, Woodward said. "Any way you look at it, it's much worse and it's going to last much longer."
There will be a boom, he said. "At first, I was saying it will be like the others, a positive. But now, I don't think so. This city is closed. This is billions of dollars of economic activity lost."
"At this point, it's still overwhelmingly a regional problem. But this could be the first time we see real spillover effects. I can't really say --- but it could provoke a recession."
No recession, argued Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
The hurricane will trim economic growth --- by 0.7 percentage points this quarter, by 0.9 percent in the fourth quarter and by 0.5 percent in the first three months of next year, he said.
But overall growth was strong --- 3 percent or better --- to keep the economy solidly expanding, he said.
Moreover, the impact will end by mid-2006, followed by the rebound effect of new building, Dhawan said. "This keeps the overall damage low."
Region more vulnerable
While the full dimensions of the human tragedy are still emerging, much of the hidden cost is environmental, said economist Gary Yohe of Wesleyan University in Connecticut.
Costs of rebuilding will have to include massive efforts to reconstruct natural barriers, he said. "The erosion of the Louisiana coastline has been going on for 50 years, and this is not a small blip. A good deal of the natural protection that stood between New Orleans and the Gulf of Mexico has been destroyed, and it won't be regenerated in a timely fashion."
So when the city is rebuilt, those protections will have to be artifically re-created.
Shaken into sacrifice
But if the hurricane has enormous costs and uncertain economic effect, it also changes America, and that is not just a matter of economics, said Robbie Blinkoff, chief anthropologist for Context-Based Research Group of Baltimore.
Blinkoff views America as a story. Like the heroes of mythology, the nation must find itself --- and the storm will be part of the search.
The attacks of Sept. 11, 2001, set America on a new course, pulling Americans closer together. And yet, while the country has fought two wars since then, most ordinary citizens have not been asked to make sacrifices.
Now, there are thousands of American refugees: The hurricane seems to be demanding that we share burdens, Blinkoff said.
"You start a journey to figure out who you are. You don't reach the end until you face a test. The attacks of 9/11 were the turning point. This is the test." [url]http://www.ajc.com/today/content/epaper/editions/today/business_34a186c920da50cf00c3.html[/url]