Katrina's Economic Impact: One Year Later


Aug. 25, 2006 — -- When Hurricane Katrina devastated New Orleans and the Gulf Coast last summer, it caused immediate and significant damage not only to that region's economy but to the country's as well.

But one year later, the nation's economy has absorbed the shock from the storm and returned to growth mode. But many in the hurricane's path weren't so lucky.

"The U.S. economy rebounded from Katrina, although the region hit by the storm has not, demonstrating once again how amazingly resilient our economy can be," said Dan Laufenberg, chief economist at Ameriprise Financial.

Thousands of people lost their jobs and were forced to move to other cities. Oil production and refining operations shut down for weeks. Gasoline prices soared, along with other energy prices. Close to 2.3 million people were left without power. The port of New Orleans was damaged, disrupting the nation's shipping industry.

To gauge how the economy responded to the most devastating U.S. natural disaster on record, the ABC News business unit contacted more than a dozen economists at various organizations, such as investment banks and trade groups, by e-mail and asked them to evaluate how the U.S. economy fared in the year after Hurricane Katrina made landfall.

The 2005 hurricane season set new records as the busiest, with 28 named hurricanes and tropical storms, and most destructive, with more than $61 billion in insured losses. Hurricane Katrina caused the greatest amount of the misery.

Insured losses from Katrina alone totaled more than $40 billion, according to the Insurance Information Institute. That was nearly double the amount of damage caused by the previous record holder, Hurricane Andrew, in 1992. Andrew left a wake of destruction in South Florida that totaled more than $21 billion in insured losses in today's dollars.

More than 200,000 homes, mostly in New Orleans and the surrounding area, were destroyed by the hurricane, far surpassing any previous disaster.

"Hurricane Andrew and the San Francisco earthquake and fire, the worst previously, destroyed 25,000-30,000 homes each," said Michael Carliner, economist at the National Association of Home Builders.

Rebuilding the homes lost to Katrina has been a slow process.

"Little new construction to replace destroyed homes has occurred over the past year in the areas directly affected," said Carliner. "It will be a decade or more before replacement building is completed, and the numbers of people and homes are unlikely to return to prehurricane levels."

A study conducted by James Richardson, an economics professor at Louisiana State University, found that after Hurricane Katrina 11 percent of homes were destroyed or deemed uninhabitable in the New Orleans area alone. Throughout the state of Louisiana, nearly 18 percent of businesses were in a similar state.

Without homes, thousands of people who left for other cities have not returned to places like New Orleans, and that means thousands of jobs have disappeared.

In his study, Richardson concluded that New Orleans lost 190,000 jobs and employment fell by more than 30 percent from August 2005 to December 2005. Statewide, Louisiana lost 214,000 jobs, or 12 percent of the state's total.

In the Biloxi-Gulfport area of Mississippi, employment dropped by 26,900 jobs -- a loss of more than 23 percent of jobs in the region.

Without jobs and with uninhabitable homes, many homeowners stopped paying their mortgages, and their loans quickly became delinquent.

"The impacts of Hurricane Katrina on Louisiana and Mississippi caused the U.S. mortgage delinquency rate to rise significantly in the third quarter of last year," wrote Doug Duncan, chief economist at the Mortgage Bankers Association. "The two states already had the highest delinquency rates in the nation prior to the storm."

While many mortgage providers delayed collecting overdue payments, Duncan expected that many of the homes have been abandoned, and banks and mortgage providers will start to foreclose on homes this year.

Hurricane Katrina was particularly damaging to the nation's oil and natural gas industry, which is based mainly in the Gulf of Mexico. At the time the storm hit, the Gulf of Mexico represented approximately 29 percent of all domestic oil production and 47 percent of the nation's 17 million barrels a day refining capacity.

On Aug. 30 of last year, the day after the storm made landfall, 95 percent of oil production in the Gulf ceased. Oil companies hurried to restaff the platforms they had evacuated before the storm and make any needed repairs. But 10 months later, yearly oil production was still 30 percent less than pre-Katrina levels.

"The hurricane had a short-term effect on the general U.S. economy only because of a temporary reduction of the supply of oil, natural gas and gasoline," explained William Niskanen, chairman of the CATO Institute.

The storm also shut down refineries throughout the region. Seven of the nine facilities that can refine up to 1.5 million barrels of crude oil a day were up and running by November 2005. Two refineries, however, took longer to restart.

ConocoPhillips' refinery in Belle Chasse, La., which produces 247,000 barrels a day, returned to normal operations only in April of this year. Murphy Oil's Meraux, La., refinery started up with 80 percent of its refining capacity in May.

The short-term shutdown in refining capacity led to shortages of gasoline throughout the nation and spikes in gas prices at the pump. On Sept. 5, 2005, the average U.S. price for a gallon of gasoline set a new record at $3.07, according to the Energy Department.

"The spike in energy prices due to the loss of refining capacity pulled money out of consumers pockets and slowed the economy slightly in the fourth quarter," said Dean Baker, economist and co-director at the Center for Economic and Policy Research. "These immediate effects had largely dissipated by the end of the year. If anything, the rebuilding from the storm (financed by insurance and government assistance) was giving a modest boost to the economy by the beginning of 2006."

The combination of higher prices at the pump, along with the loss of thousands of jobs, hurt the overall economy at the end of last year. Gross domestic product, or GDP, the measure of all goods and services produced in the country, dropped to 1.8 percent for the last three months of 2005 compared with a growth rate of 4.2 percent from the previous three months.

Mesirow Financial chief economist Diane Swonk wrote: "Katrina had real distortionary effects on the economy, shaving growth from the fourth quarter as both disruptions to business and the drag of higher energy costs played out, and then boosting growth in the first quarter as reconstruction got underway."

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."

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."

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.

Despite the destruction, and the personal and financial impact to people in the path of the storm, the majority of economists surveyed by the ABC News Business Unit said the storm had a only short-term impact on the nation's economy.

"It's amazing how large and resilient the economy is," said Bill Dunkelberg, economist for the National Federation of Independent Business.

One year later, the majority of economists contacted by ABC gave the U.S. economy a 'B+' to 'A' for its response to Hurricane Katrina.

"New Orleans' impact on the U.S. economy was limited to energy and port activities, and the rest was easily replaced," said Naroff. "And that may be the lesson. You can lose a city and not have any major impact on the economy over time. Many activities will be replaced in other parts of the country."

Bob Hartwig, chief economist at the Insurance Information Institute, gave the economy at 'B+' saying, "I would have given it a higher grade were it not for persistently high energy prices."

That's one price everyone continues to pay since Katrina made landfall a year ago.