Wednesday, September 14, 2005

Economic Impact Following Katrina

The New Orleans flooding which followed in the wake of hurricane Katrina has developed into the most damaging flood in U.S. history. Sources estimate that at least 150,000 properties have been flooded, surpassing the previous U.S. record from flooding and levee failures on the Lower Mississippi river in 1927, which inundated 137,000 properties.

How hard will the nation be hit economically following the Katrina disaster?

First, you have to factor in the downtime expected (an estimated 3 months ...September thru November).

Next, you have to consider the economic size of the areas affected:

Louisiana's gross state product is about 1.2 percent of U.S. GDP, but the state ranks first in the U.S. in terms of specialization in water transportation and third (behind Alaska and Wyoming) in terms of specialization in oil and gas extraction. While the New Orleans-Metairie-Kenner Metropolitan Statistical Area (MSA) only accounts for about 0.4 percent of U.S. personal income, the MSA accounts for over one-third of Louisiana's personal income.

Mississippi's gross state product is about 0.7 percent of U.S. GDP. Together, the Gulfport-Biloxi and Pascagoula MSAs account for 15 percent of Mississippi's personal income.

Alabama's gross state product is about 1.2 percent of U.S. GDP. The Mobile, Alabama MSA accounts for about 8 percent of Alabama's personal income.

Meanwhile, in insurance terms, economic loss from Hurricane Katrina and subsequent flooding in New Orleans is expected to exceed $100 billion, according to Risk Management Solutions (RMS).

At least 50% of total economic loss is expected to come from flooding in New Orleans, in addition to hurricane losses from wind and coastal surge, infrastructure damage, and indirect economic impacts. RMS issued preliminary insured loss estimates of up to $25 billion for Hurricane Katrina, prior to evidence of levee failure and flooding in New Orleans that was reported on Tuesday, August 30.

According to RMS, the value of physical property in the flooded areas is approximately $100 billion. While the majority of property damage occurs once flood waters enter a structure, prolonged immersion of wooden residential buildings in warm polluted water will lead to rapid deterioration requiring an increasing proportion of the building stock to be completely replaced. There will also be significant costs associated with land and building decontamination.

Losses from business interruption and displacement of residents are highly dependent on the duration of the flooding and repairs. RMS estimates that the costs of interrupted economic activity exceeds $100 million per day. There is also some risk that businesses may choose to relocate if they are unable to return in a timely manner, impacting the area's long-term economic recovery.

The coastal region of the Gulf of Mexico supplies 29% of domestic oil production and 21% of domestic natural gas production. Katrina forced many production facilities to be "shut in." A shut in facility does not produce.

Price effects from Katrina will likely push inflation higher in the near term from its current moderate pace. Year-over-year inflation in the core consumer price index (CPI) was 2.13% in July. Core personal consumption expenditure price index (PCE) inflation, the Fed's preferred measure of consumer price inflation, was 1.84% in July.

On the other side of the coin, increases in the economy may come from:
- new jobs created and goods purchased for the clean-up, decontamination, reconstruction and new buildings/infrastructure in the restoration period,
- potentially expanded business in alternate ports both for the receiving and shipping of goods,
- a potential increase in alternative energy materials/goods (such as corn-burners for home heating, solar energy panels, etc.) in the face of inflated energy costs,
- a potential economic GDP increase in other regions (since some businesses may choose to relocate outside the affected area),
- a potentially more efficient infrastructure may result in long-term economic benefits in the form of reduced costs as older less efficient infrastructure gets replaced during the rebuilding phase...

There's more. But even with my former 13 years experience and 5 years formal education in Accounting, I definitely don't want to be the person responsible for adding up the final figures. Which brings up another boost to the economy in the form of administrative jobs that will be required to handle the funds that will be required for the clean-up and repairs/rebuilding.

Now I'll go back to my work-at-home life knowing how lucky I am to be able to earn a full-time income from anywhere in the world, thanks to my computer and the Internet.

USA Bureau of Economic Analysis (BEA)
Risk Management Solutions (RMS)
JOINT ECONOMIC COMMITTEE - Update on Economic Impacts of Katrina Report, Sept. 2, 2005 (.pdf document)
JOINT ECONOMIC COMMITTEE - Recent Economic Developments Report, Sept. 13, 2005 (.pdf document)

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