Katrina's Economic Impact: One Year Later

As gas prices dipped below $3 a gallon and the federal government began spending millions of dollars in reconstruction aid, along with spending by private enterprise, GDP rocketed upward at the start of the year to a very strong 5.6 percent growth for the first three months of 2006.

Peter Kretzmer, senior economist at Bank of America, said, "Household spending recovered strongly in early 2006 as the oil and gas industries recovered rather quickly and energy costs receded."

Lingering Effects

Despite the return of offshore oil production and refining operations in the Gulf region, the most significant legacy of Hurricane Katrina remains the volatile energy markets.

Reports of supply disruptions can send the price of oil and natural gas soaring. For example, when BP announced on Aug. 7 that it would shut down oil production in Alaska's Prudhoe Bay because of leaks and corrosion found in the pipelines, oil prices skyrocketed $2.22 to end the day at $76.98 a barrel, only 5 cents from the previous record.

Higher prices for a barrel of oil translate into higher prices at the gas pump. Recently, gasoline prices have averaged close to 30 percent higher compared with last year.

The impact of Hurricane Katrina on oil production and refineries has made oil traders more skittish when it comes to hurricanes in the Gulf of Mexico.

"The first Gulf hurricane [of this year] could create an excessive reaction in the energy markets," said economist Joel Naroff.

Bill Cheney, chief economist for John Hancock Financial Services, agreed: "The only really big long-term impact is on the psychology of the energy market. Katrina put the hurricane season front and center in every oil trader's consciousness, and I imagine that every named storm is going to cause increased ripples in oil futures compared with previous years."

Mark Zandi, chief economist at Moody's Economy.com, said, "The principal concern is if a hurricane affects the energy production in the Gulf. Another Katrina-like hurricane will send energy prices surging, which the national economy will have a difficult time digesting this go around."

For Many, Financial Pain Continues

Standard & Poor's chief economist, David Wyss, pointed out that while energy continues to be a major issue for the economy as a whole, the region is susceptible to even more damage.

"New Orleans itself remains very vulnerable, with the levees still unrepaired in large part, and the status questionable in view of the fundamental construction and engineering problems that were exposed," he said.

In addition, several economists noted that while the U.S. economy rebounded quickly from Hurricane Katrina, regional economies and many individuals continue to suffer.

Zandi summarized the storm this way: "A short-term event for the U.S. economy; a very painful long-term event for New Orleans and Gulfport, Miss., where the economies are still struggling."

"The major long-term effects are the [continuing] displacement of close to 600,000 people and higher homeowner insurance rates for people living in areas vulnerable to hurricanes," said Dean Baker. "Of 1.5 million people displaced by the storm, more than 900,000 have moved back to the area. These people are employed in almost the same percentages as the population as a whole. However, 600,000 people still have not returned to the area.

Where the Economy Stands, One Year Later

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