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Hurricane Katrina

More than gas will cost more

The storm's reach will be felt by businesses and consumers across the country.

By KRIS HUNDLEY
Published September 2, 2005

	MORE COVERAGE: MULTIMEDIA Multimedia: Continuing fallout Latest Times photos Storm Watch blog

When Hurricane Katrina decimated the Gulf Coast on Monday, it delivered a blow that's already being felt by farmers in the Midwest, machine shops in the Southeast and drivers everywhere.

Economists, still trying to gauge the impact of the horrific storm, are predicting Katrina could knock as much as 1 percent off the nation's economic growth for the fourth quarter. And that estimate could grow when more information is available on the extent of the damage to the gulf region's oil production platforms and refineries.

Despite the devastation, no one is yet projecting that Katrina's blast will be enough to knock what has been a vigorous economy into a recession. But there's no question the storm has been a shock to the system. Several economists say they think it may be enough to cause the Federal Reserve Board to take a break from its recent habit of raising interest rates when it meets Sept. 20.

"I've got to believe that the hurricane and rising gas prices are doing more to slow the economy than a quarter-point rate hike would ever do," said Mark Vitner, senior economist at Wachovia. "It seems an opportune time for them to pause."

The gulf region accounts for 30 percent of the nation's oil production and almost half of the country's oil refinery capacity. Late Wednesday afternoon, several refinery operators reported finding less damage than feared, though eight of 14 refineries are still out of operation either because of damage or because electricity is unavailable to run them.

There were no estimates on when drilling platforms might return to operation, but losing a batch of refineries at a time when production already had been running at nearly 100 percent has had the predictable effect on gasoline prices.

Kevin Lindemer, managing director of Global Insights in Lexington, Mass., said, based on latest reports, he believes retail gas prices will rise as high as $3.50 through September, then drop to $2.50 by the end of the year.

"But that's assuming no major surprises," he said. "The situation is very fluid with a lot of unknowns, and the market is very sensitive to events."

In addition to causing an immediate spike in retail gas prices, Katrina is having broader repercussions. It has badly snarled a transportation system that moves an enormous variety and volume of products through New Orleans by water, rail or road.

"We're seeing exactly how important the port of New Orleans has been to the U.S. economy," Vitner said. "Everything from coffee to cereal manufacturing will probably be impacted."

Midwestern farmers who rely on barges to move their grain already are seeing crop prices drop because shippers can't get it down the Mississippi. Steel that usually is imported through New Orleans' port and is destined for metal fabrication shops throughout the South will have to find alternate routes.

But finding alternative transportation will be difficult and expensive because both rails and trucks are already operating near capacity. Higher costs are likely to result in higher prices - for everything from cereal to meat to auto parts - for the retail customer.

Peter Morici, a professor at the University of Maryland's School of Business, said destruction to the transportation infrastructure in the gulf has been so extensive that restoring it will be a major challenge.

"They can probably get the refineries back up within weeks or a month," he said. "But the storm has washed out east-west transportation routes. And it looks like it actually shifted the river channel, so they may have a problem getting the waterway open. That's going to slow manufacturing throughout the Southeast."

In typical hurricanes, the early days of recovery bring a sharp decline in economic activity, but those doldrums are followed by an equally sharp spike. Money flows in with workers and supplies to fuel a cleanup and rebuilding effort that pads economic growth in the affected region.

But Hurricane Katrina may not be typical.

Wachovia's Vitner warned the Gulf Coast's recovery will be a much longer, more drawn-out affair than Florida experienced after last summer's storms. The reasons: Mississippi and Louisiana are poorer than Florida and don't have the population growth to drive rebuilding.

"The recovery there will take three to five years," he said, adding that Florida grows at 2 percent a year while Louisiana's growth is one-tenth that rate. "It's not going to be anything that will impact the GDP numbers."

Katrina also can't compare with Hurricane Andrew in 1992, although it appears to be rivaling that storm in estimated damages.

"When Andrew hit, the South Florida economy was incredibly weak," Vitner said. "There were plenty of supplies and workers, and it was mostly wind damage, which was insured. That wasn't the case here, where most of the damage was flood, which is typically not insured."

Experts also say Katrina, for all its destruction and loss of life, cannot be compared with the terrorist attacks of 9/11. The economy is much stronger now than it was in the fall of 2001.

And the psychological effect of the event is also noticeably different.

Lynn Reaser, chief economist at Bank of America, said 9/11 was so traumatic, it devastated the confidence of consumers, businesses and the financial markets.

"This shock is clearly devastating, but it's not a new experience," Reaser said of Hurricane Katrina. "The bright spot is that Americans are incredibly resilient."

Kris Hundley can be reached at 727 892-2996 or hundley@sptimes.com

[Last modified September 2, 2005, 02:15:35]