Macroeconomic effects of Hurricane Katrina - Essay Example

Macroeconomic effects of Hurricane Katrina Introduction In 29th August 2005, Hurricane Katrina1 made landfall on the Gulf Coast in the United States. Katrina caused considerable disruption to the Gulf coast due to its devastating human costs and massive property damage. It is estimated that Katrina caused a $100 billion worth of damages to residential and business property and infrastructure (Reed 1). Damage from Katrina far exceeds the economic damage from Hurricane Andrews, which was considered the costliest U.S. hurricane since 1900 before Katrina hit2. Katrina has caused the dislocation of so many people who will need housing, access to health care, education for their children, and means to meet their basic needs. It still is important to determine and predict the macroeconomic effects of this national disaster. This paper aims to provide such a discussion. However, a complete macroeconomic evaluation would require a more in-depth rigorous study. For the sake of brevity, relevant factors are discussed such as Labor force, GDP, inflation, trade and energy supply and prices. With these, it is hoped that we can paint a good deal of changes in the socio-economic scene that can be attributed to Hurricane Katrina. 2. Katrina's Effect on Property and Capital Destruction of bridges, highways, residential and business property represent a permanent loss in national wealth and capital. Congress has appropriated $62 billion for Katrina relief activities, which would increase the budget deficit. Most economic activities came to a halt as a result of the devastation of Katrina. New Orleans flood accounts for almost half of the total property damage. The National Association of Home Builders (NAHB) expects the number of residential property that was damaged to be more than 200,000 homes in New Orleans only. (NAHB, 2005). 3. Katrina's Effect on the GDP Gross domestic product (GDP) is a measure of current economic activities. Evacuation of the Gulf coast reduced economic activities in the region in the short term, which decreased GDP. Resources that would have been used for investment and spending are now to be used rebuilding. Reconstruction activities generate jobs and income which adds to the GDP. Reconstruction activities are expected to restore the level of GDP to what it was before Katrina. Loss of wealth and capital due to Katrina would not influence GDP. GDP is a measure of current activities, not a measure of nation's wealth. GDP would not capture the economic impact nor the devastating loss of life and dislocation associated with Katrina (Reed 4). 4. Katrina's Effect on the Economic Growth White house economic advisor said in August 31, 2005: "Hurricane Katrina is likely to have only a modest impact on the U.S. economy as long as the hit to the energy sector proves transitory."3 Congressional Budget Office (CBO) expected Katrina to dampen national (inflation-adjusted) economic growth rate by 0.5 to 1 percent only and reduce employment by about 400,000 in the second half of 2005. CBO anticipated that economic growth and employment are likely to rebound during the first half of 2006 as rebuilding accelerates (First 3). The following table summarizes the forecast projections (Reed 3). Table 1: Estimated Effects of Hurricane Katrina on Economic Growth.4 5. Katrina's Effect on the Labor Force Katrina destroyed the infrastructure of most businesses in the Gulf Coast. Workers' homes were also destroyed and the labor force decreased substantially in the Coast as people evacuated the area. When reconstruction efforts started pumping money into the region, new jobs started to surface. It would still take time to regain the labor force that existed in the Gulf Coast prior to Katrina. Job losses in the Gulf Coast would overwhelm growth in jobs across the nation (Reed 6). 6. Katrina's Effect on the Consumer Prices and Inflation It is expected that on the short run, consumer prices will rise due to rise in energy prices. Decrease in supply of petroleum, natural gas, and refined product will lead to higher energy prices. As throughput of crude oil production and refinery pick up, energy prices are expected to fall but not to levels prior to Katrina in the near term. As consumer prices increase, inflation rate is expected to increase in the short term too. The expected decrease in energy prices should hold down overall inflation rate. Katrina is expected to raise the average rate of inflation by 1% in 2005 (Reed 7). 7. Energy Supply and Prices The gulf region produces 6.5% of domestic crude oil consumption and 16% of natural gas consumption. Katrina shut down most oil refineries in the gulf area decreasing refining capacity by about 2 million barrels per day (Cashell 4). As the supply of oil decreased, prices of oil rose sharply in the days following Katrina. As rigs and platforms in the Gulf started to recover and as supplies of crude oil from the Strategic Petroleum Reserve were released, oil prices returned to its levels before Katrina. (Bamberger and Kumins, 2005). 8. International Trade Katrina temporarily halted all loading points within Gulf ports for import and export. Imports through Gulf ports equate to about one sixth of all imports passing through U.S. ports. Louisiana contains five of the 12 largest U.S. ports, including the first (South Louisiana) and fifth (New Orleans) largest, and Mobile, AL is the fourteenth largest.5 Most ports were reopened to traffic shortly after the hurricane. Gulf Ports handle a significant portion of U.S. grain exports and oil imports. Maritime international exports add to GDP, while imports subtract from GDP. If the disruption of trade caused by Katrina influence both exports and imports in the same amount, GDP would remain unchanged. GDP would decrease only if international exports fall (such as reduced agricultural exports). GDP would also decrease if international imports rise (such as more oil imports) (cashell 5). 9. Conclusion Hurricane Katrina has made a major dent in the economies of southern Louisiana and Mississippi. Macroeconomic effect of Katrina is much less dramatic since both states account to a very small portion of the U.S. economy. Katrina's induced unemployment and expected declines in customer spending would battle against investment and export spending towards the timing and magnitude of layoffs in auto and related industries. Investment in rebuilding the Gulf Coast would allow dislocated inhabitants to return home. Reconstruction activities in the Gulf Coast would help cushion the macroeconomic effect of Katrina. Replacing and rebuilding the capital lost would enable the southern states of Mississippi and Louisiana to regain their abilities to provide their share in national growth. Work Cited Bamberger, Robert and Lawrence Kumins (2005). Oil and Gas: Supply Issues After Katrina. CRS Report RS22233: CRS Publications. Cashell, Brian. Marc Labonte "The Macroeconomic Effects of Hurricane Katrina". Government and Finance Division, CRS Report for Congress. 2005. First, William. "Macroeconomic and Budgetary Effects of Hurricane Katrina". U.S. Congress, Congressional Budget Office. Washington, DC. 2005. NAHB (2005). News release on the Hurricane Katrina destruction of property. 2007. Reed, Jack. "Potential Economic Impacts of Hurricane Katrina." U.S. Joint Economic Committee Democrats, 2005. Read More