copyright © 2005 global insight, inc. the economic impact of hurricane katrina nariman behravesh...

Copyright © 2005 Global Insight, Inc.

The Economic Impact of Hurricane Katrina

Nariman BehraveshPhil Hopkins

Paul BinghamKevin Lindemer

Nigel Gault

Global Insight Webcast

September 8, 2005


Introduction

Nariman BehraveshChief Economist

Global Insight

Copyright © 2005 Global Insight, Inc. 3 09/08/2005

Worst Storm Ever (?)…

Deadliest storm before Katrina — 1900 hurricane that destroyed Galveston, Texas (6,000 to 8,000 dead)

Most costly storm before Katrina — Hurricane Andrew in 1992 (cost: approximately $26.5 billion)

The death toll from Katrina could rise as high as 10,000

The cost of the hurricane could easily exceed $100 billion

The damage to the national economic infrastructure is greater than any other storm


…With Large National Economic Impact

Most hurricanes and other natural disasters have a small impact on the national economy

Katrina’s impact will be considerably larger and could last longer for three reasons:

First, New Orleans, which is around 0.4% of the national economy, could be shut down for many months

Second, the port of New Orleans (the second largest in the nation) has sustained some damage, which could affect both import and export flows

Third, and most important, the vast energy infrastructure in the region has sustained some damage


…With Large National Economic Impact (cont.)

Big question: How soon will the energy infrastructure become fully operational?

Good news: The US and world economies had a lot of momentum going into this storm

Bad news: This is a supply shock on top of a demand shock, and inflation-adjusted oil and gasoline prices are close to all-time highs


Comparisons With 9/11

The human toll and economic costs of Katrina will be higher than 9/11

The economy is much stronger now than in late 2001…

…However, even 9/11 did not kill the embryonic recovery

Thanks to Y2K preparations in 2001, the backups for the financial infrastructure were in place — backups for the energy infrastructure in Louisiana have been quite limited

The policy response to Katrina will likely be muted compared with 9/11


The Risks Are Predominantly on the Downside

Energy markets are still very tight and any further disruptions (Nigeria, Venezuela, Iraq, etc.) could push prices to new highs

Inflation could begin to rear its ugly head

There is a risk that both consumers and business could become much more cautious

Could this be the straw that breaks the back of some large companies in the transportation sector?

Could this be the event that deflates some regional housing bubbles?


Regional Economic Impacts of Katrina

Phil HopkinsManaging Director

US Regional ServiceGlobal Insight


The Affected State Economies

The states and MSAs that Katrina hit have smaller, less diverse, and less resilient economies than in Florida in 2004 But Katrina affected key sectors: energy, tourism, manufacturing, and

transportation — notably shipping

Alabama, Louisiana, and Mississippi have been under-performing the US

Employment Growth Rate GSP(Year-over-year) (2005-Q2)

Louisiana 43rd

Mississippi 30th

Alabama 33rd

GSP in these 3 states is 61% of Florida’s

Potential insured losses of $25 billion are a high share of Louisiana and Mississippi economies

$158.7 billion 24th

$80.3 billion 35th

$145.5 billion 25th


New Orleans Economy

Size of the New Orleans MSA GMP of $48.5 billion — 47th among 361 MSAs Population — 1.32 million (40th) Employment — 620,400 jobs (41st)

MSA economic activity occurs in two parishes Orleans (city of New Orleans) — 41.4% of MSA employment Jefferson parish to the west — 36.0% of MSA employment

Historically, a significant share of low-income, low-skill residents. According to the Bureau of Census in 1999: 18.4% of population living in poverty (10.9% for US large MSAs) 77.7% of workers 25 and older had high school degrees

(82.1% for US large MSAs) Has been declining in relative economic importance compared to other

large sunbelt MSAs Economy has become less diverse and more specialized in tourism,

energy, and transportation


New Orleans Has Declined in Relative Economic Importance


Size of the Affected Economies in 2005

PopulationTotal

EmploymentGross Metro

ProductPer Capita

Income

(Thousands) (Thousands of jobs)

(Millions of dollars)

(Thousands of dollars)

Orleans Parish 456.5 256.6 $18,220.9 $33.15

New Orleans MSA 1,320.4 620.4 $48,596.7 $33.40

Affected Region 2,537.9 1,107.4 $85,670.4 $29.98


Employment By Sector in the Affected Economies

The affected area consists of coastal MSAs and counties that had hurricane force winds: MSAs — Houma, New Orleans, Gulfport/Biloxi, Pascagoula, and Mobile; and non-MSA counties — Tangipahoa, LA; Washington, LA; and Pearl River, MS.

Orleans Parish New Orleans MSA Affected Area

(Level) (%) (Level) (%) (Level) (%)

Const., Natural Res. & Mining 10.7 4.2 41.0 6.6 76.6 6.9

Manufacturing 7.3 2.8 38.8 6.3 86.1 7.8

Transp., Trade, & Utilities 35.9 14.0 122.2 19.7 227.2 20.5

Information 4.5 1.7 9.5 1.5 16.4 1.5

Financial Activities 14.1 5.5 35.1 5.7 57.9 5.2

Prof. & Business Services 33.4 13.0 73.4 11.8 120.4 10.9

Educational & Health Services 40.5 15.8 85.4 13.8 131.9 11.9

Leisure & Hospitality 44.8 17.5 85.9 13.8 148.2 13.4

Other Services 9.6 3.7 23.0 3.7 41.1 3.7

Government 55.8 21.7 106.1 17.1 201.5 18.2

Total Non-Farm 256.6 100.0 620.4 100.0 1,107.4 100.0


Short-Term Economic Impacts in New Orleans

September’s private-sector employment in the city will approach zero — workforce has evacuated

Economic activity in the city (Orleans parish) will fall sharply in 2005-Q4 184,000 (72%) in City and 311,000 (50%) in MSA

Sectors with major employment losses in 2005-Q4: trade, information, finance, and services (professional and business, leisure and hospitality, and others)

Sectors with recovering employment in 2005-Q4: construction; transportation; utilities; health; federal government; state and local government, excluding education

Slow recovery in 2006-Q1 — employment levels could still be down 25% in City, and 19% in MSA

Decline in MSA gross metro product is $7.5 billion (16%) in 2005 and $7.2 billion (14%) in 2006


Factors Determining the Economic Recovery in New Orleans

Short TermHow quickly water is pumped out and clean-up occursLevel of government spending at all levelsShare of damage that is insured and speed of claims paymentResumption of utility servicesResumption of economic activity in key sectors (e.g., shipping)Finding housing for required workers

Long TermCost of remediation and rebuildingCondition of major attractionsWhat percent of evacuees will return? Can they afford to?What share of relocated businesses will return?Scope and cost of flood protection measures —

including risk reductionHow different will a rebuilt New Orleans be? Smaller, less dense,

and more specialized?


Economic Recovery in Mississippi and Alabama

Value of property damage is high compared to the size of their economies

Impacts are more significant in percentage terms and will be longer-lasting than in Florida last year

But less severe and less uncertain than in New Orleans

Condition of transportation infrastructure (I-10 and ports are key)

Reconstruction spending will generate increased economic activity

Will there be enough skilled workers?

Casinos: How quickly can they reopen? Where?

Less emphasis on building protective structures, more on building codes and location of activity


Impact of Katrina on Transportation and Trade

Paul BinghamPrincipal

Global Trade and Transportation ServiceGlobal Insight


A Resilient National Transportation System

US freight transportation system was operating fluidly before Katrina struck

Impacts on local port, railway, and highway network are significant and will take time to fix, though more regional than national

Through traffic affected — diversions take time, money, and capacity, but are working

Spikes in fuel prices affect carriers, but some are insulated from impacts through fuel charges passed on to shippers, though with a lag


Mississippi River Port Impacts Are Mostly Short Term

Ports on Lower Mississippi River: New Orleans, Ports of S. Louisiana and Baton Rouge are nationally important ports for trade, so concerns are valid

Baton Rouge had no damage

Reports are that infrastructure is largely intact

River channels have been opened to ocean vessel movements so upriver ports are no longer cut off — most vessels were moved out of the way

Still early for crop export season, so corn and soybean exports not significantly restricted

Near-term concern is skilled port labor availability at damaged ports, not underlying infrastructure


Key Gulf Coast Port Commodities

Top US agriculture commodity export port region

Agriculture imports: coffee, sugar, fruit

Crude oil imports; petrochemical trade

Steel and rubber imports

However, not a critical national gateway for containerized trade


Coastal Port Impacts Vary By Location

Gulfport, Mississippi severely damaged — this niche port handles imported fruit and a little export container traffic, banana imports are diverted to Florida & Texas

Other ports (Mobile, Pensacola, Lake Charles) had limited damage and were unaffected or have resumed operations

Houston is receiving some diverted cargo


Likely Impact on US Trade Is Limited

US trade impact is mostly in short-run, with disruptions in deliveries and shipments in Gulf Coast in August and September

Very few exports lost to competitor countries

Eventually, construction from rebuilding projects will raise import volumes of bulk and break-bulk commodities through the ports

Overall US trade impact may be a small net increase in imports in 2006


Energy Impact

Kevin LindemerExecutive Managing Director

Global Energy ServiceGlobal Insight


Key Observations and Issues

Worst of the impacts of the hurricane are past and conditions will gradually improve absent unexpected events

US production and refining capacity should return to 'manageable' levels within 30 days of the hurricaneNatural gas is the one possible exception if storage levels

going into the winter are very low

Prices are expected to erode slowly — consumers will be paying 37% more for a gallon of gasoline in December than a year ago, and home heating bills may be 30–40% higher

US production in the medium- to longer-term will be lower than expected before the hurricane

Has Hurricane Katrina become a catalyst to bring energy back to the center stage in the US and global markets?


Hurricane Katrina

Impact on US Oil, Gas, and Refining

Day 1 Day 7 Day 14 Day 30 Day 60

Refining Capacity Volume mbd 1.7 1.1 0.6 0.3 0.2

Percent of US Capacity 10% 6% 4% 2% 1%

Crude Oil Volume mbd 1.4 0.87 0.7 0.5 0.3Production Percent of US Capacity 18% 11% 9% 7% 4%

Natural Gas Volume bcf/d 8.4 4.2 3.25 2 1Production Percent of US Capacity 17% 8% 6% 4% 2%


WTI: Price Range in $/Barrel

WTI ($/barrel)

High

Low

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

Jan-05 Apr-05 Jul-05 Oct-05


Henry Hub Index: Price Range in $/Million BTU

Henry Hub ($/Million Btu)

High

Low

$4

$6

$8

$10

$12

$14

$16

Jan-05 Apr-05 Jul-05 Oct-05


Impact on Natural Gas Storage

Natural Gas Storage Adjusts to Katrina Production Losses but Winter Weather Compounds Risks

Cold

Post KatrinaAverage Weather

Warm2004-5

0

500

1,000

1,500

2,000

2,500

3,000

3,500

May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06

Even with a Normal Winter, Post Katrina Storage will Lag Last Year Thus Adding to Price Pressures;A Cold Winter Means Very Low Storage

Widening Gap Is Impact of Katrina Production Losses

(Bcf)


US Macroeconomic Impacts

Nigel GaultManaging Director

North American MacroeconomicsGlobal Insight


Hurricane Damage Estimates

Sources: Insurance industry estimates; Commerce Department; Global Insight assumptions for Katrina

Private Insurance Costs

($ Billion) (% of GDP)

Florida Hurricanes (2004) 23.3 0.20

Katrina (2005) 35.0 (assumed) 0.28

National Accounts Basis Capital Destruction

($ Billion) (% of GDP)

Florida Hurricanes (2004) 29.5 0.25

Katrina (2005) 55.0 (assumed) 0.44

Total “Costs” from Katrina probably $100 billion-plus (0.8% of GDP)


Katrina Hurts Growth — Temporarily

0

1

2

3

4

5

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4

August 2005 Forecast September 2005 Forecast

(Real GDP, percent change annual rate)


Inflation Spikes Briefly

0

1

2

3

4

5

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4


(CPI, percent change from a year earlier)


Gasoline Prices Dampen Consumer Spending Growth

Every $0.10 on the price of gasoline is like a tax hike of 0.13% of disposable income.

0

1

2

3

4

5

05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4


(Consumer spending growth, percent change annual rate)


Employment Takes a Hit

-200

-150

-100

-50

0

50

2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4

Difference Between September and August Forecast

(Employment, thousands, average)


Fed May Pause — But Not For Long

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4


(Federal funds rate)


Federal Budget Deficit Will Rise

250

275

300

325

350

2005 2006


(Billions of dollars, fiscal year)


Global Impacts

Nariman BehraveshChief Economist

Global Insight


Global Impacts

The major transmission mechanism of the Katrina shock to the rest of the world will be through higher oil prices and weaker US growth

Because of weak domestic demand, the Eurozone and Japan are more at risk from higher oil prices than the US

So far, the impact of higher oil prices in many emerging markets has been limited, thanks to fuel subsidies…

…However, the finances of many state-owned oil and energy companies are deteriorating and energy subsidies are likely to be lowered soon


Impact of Katrina on World Growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2005 2006 2005 2006 2005 2006

Pre-Katrina Post Katrina

Source: Global Scenario Model

World Eurozone Japan


Bottom Line

Katrina is most likely the worst storm ever to hit the US…

…With a larger than usual economic impact because of damage to trade and energy infrastructure

Provided the energy infrastructure is fully operational soon and energy markets return to “normal”, oil and gasoline prices should continue to slide between now and the end of the year — but most of the risks are on the upside

Given the strong momentum of growth since the spring, the impact on real GDP growth will be modest…

…However, the vulnerability to another shock has increased


Thank you!

Q & ATo ask a question, please click on the

“Ask a Question” button within the Webcast system. Please type your question in the

pop-up box and click “Submit.”

copyright © 2005 global insight, inc. the economic impact of hurricane katrina nariman behravesh...

Documents