Katrina’s Impact on the US Economy
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Hurricane Katrina devastated New Orleans and the Gulf Coast and will pound the U.S. economy with higher energy prices, commodity shortages–and even steeper coffee prices.
Worse, the storm may blast inflation throughout the economy.
Storm damage is estimated at $40 billion, including $26 billion covered by insurance–the largest payout ever.
Hurricane Katrina devastated New Orleans and the Gulf Coast and will pound the U.S. economy with higher energy prices, commodity shortages–and even steeper coffee prices.
Worse, the storm may blast inflation throughout the economy.
Storm damage is estimated at $40 billion, including $26 billion covered by insurance–the largest payout ever.
After an initial downturn, Merrill Lynch says, rebuilding efforts following a major storm typically boost the gross domestic product. Such a view goes against the conventional wisdom, but the GDP measures current production–and there will be a massive cleanup followed by years of rebuilding in Katrina’s wake.
But this storm is different because it whacked oil and natural production in the Gulf of Mexico, and at least eight refineries in the region have shut down.
About 10% of U.S. daily consumption, or 2.5 million barrels, is either produced or shipped in the Gulf. The price of crude, already nearly double that in June 2004, is now close to $70 a barrel. Increased demand in China and India has some analysts predicting the price will soon hit $100 a barrel.
This will quickly translate into higher fuel prices that will rip through the economy. Contracts for heating oil scheduled for delivery in December are up 7.5% from last Friday, natural gas is up 11% and gasoline is up 7.4%, Merrill Lynch says. On Tuesday, wholesale gasoline prices rose nearly 40 cents, adding another 30 cents on Wednesday.
“If these future prices hold, it has the potential of shaving about $30 billion from U.S. economic growth,” Sheryl King and David Rosenberg, economists at Merrill Lynch, conclude.
Katrina will kick the stuffing out of the tourism, gaming and convention industries in the region, which relies heavily on revenues from visitors, and extensive damage means the downturn will last longer than usual. Merrill Lynch says nonfarm payrolls in September could see a sharp decline. Disruptions in energy supply and logistics are also likely to hurt manufacturing.
The region pounded by the storm employs about 1.6 million people, who produce goods and services valued at about $130 billion a year. The numbers sound huge, but overall, the areas hit hardest by Katrina–New Orleans, Baton Rouge, Lafayette, Lake Charles, Houma and Alexandria in Louisiana; Gulfport, Biloxi and Pascagoula in Mississippi; and Mobile in Alabama–account for 1.3% of U.S. employment and 1.1% of U.S. GDP.
Still, in the broader economy, long-term interest rates continue to fall. This narrows the gap with short-term rates, erasing the profits banks make from borrowing short and lending long. Expect this to pinch profits for banks in the second half. This could encourage the Federal Reserve to hold back on raising rates–or even consider lowering rates.
Barge traffic on the Mississippi River is shut down, and no tankers or other cargo ships are moving in or out of the Port of New Orleans.
Cellular provider Cingular Wireless–a joint venture of BellSouth and SBC Communications (nyse: SBC – news – people )–and Sprint Nextel (nyse: S – news – people ) say mobile-phone service has been hit hard. Wireless service is nearly or completely out in hard-hit areas, including Gulfport and Brookhaven in Mississippi. In New Orleans, service is almost completely out, and key equipment remains underwater.
The hurricane punched a major hole in theU.S. telecommunications system, creating problems outside the storm’s path. Networks in Texas are experiencing congestion due to the large number of calls going across the system, including many who fled inland to escape Katrina’s fury. Sprint Nextel customers in Florida also have been hit because much of the company’s long-distance traffic is routed through a building in New Orleans that’s now underwater.
New Orleans residents who sought refuge in the Superdome are being moved to the Astrodome in Houston. The hurricane blew off a small section of the room in the Superdome, and the sewer pipes backed up.
In New Orleans, tons of coffee–at least 1.6 million sacks–is stacked in warehouses. It’s too early to tell if the beans were damaged, but judging from the extensive flooding, prospects don’t look good for those looking to economize on their morning jolt of java.
SOME OF THE MAJOR SECTORS HIT BY KATRINA ARE:-
PORT OF NEW ORLEANS
Katrina’s direct hit on Southern ports roiled several markets, sending trading prices higher on the major exchanges for soybeans, wheat, coffee and steel, among other goods. Barge traffic along the Mississippi is currently shut down, with no tankers or other cargo ships moving in or out of the Port of New Orleans. That’s slowing the 62% of agricultural products that regularly move through the port. Reports said that ships were being secured along the bluffs north of Baton Rouge and that grain exports could be stopped for several days
SOYBEANS
With the Port of New Orleans shuttered and soybeans unable to move through there, soybean futures were up 4 cents on Wednesday, to $6.06.
COTTON
Hurricane Katrina, cutting a swath northward through some of the nation’s lushest cotton-growing territory, may have irreparably damaged some key fields. Cotton futures soared to three-week highs and should continue rising as damage assessments continue to arrive.
BANANAS
Reports say imports of bananas from Latin American-producing countries may shift to Florida, a more expensive operation that could result in price hikes at U.S. supermarkets.
SHRIMP AND OYSTERS
About half of all shrimp consumed in the U.S. is imported through or fished out of the Gulf. Katrina struck right at the peak of harvesting season. At the same time, Louisiana is the nation’s top oyster producer, and wholesalers are waiting in fear to see if the beds have been damaged.
RETAILING
Some 123 Wal-Mart stores have shut down, with a lot of goods lost forever. Within New Orleans and other stricken communities, there has been widespread looting. That, together with flood damage, could make Hurricane Katrina the nation’s single most costly natural disaster.
GAMBLING
MGM Mirage and Harrah’s, among others, shut down operations over the weekend. Each could lose millions for each day it stays closed. Mississippi and Louisiana river-gambling boats have all been beached and in some cases seriously damaged and looted. Shares of both Harrah’s and MGM have dropped about 4% since Monday.
TELECOMMUNICATIONS
Cellular providers Cingular Wireless and Sprint Nextel say mobile-phone service is nearly or completely out in hard-hit areas, including Gulfport and Brookhaven in Mississippi. In New Orleans, service is almost entirely down, and crucial equipment remains underwater. Texas networks are clogged by the large number of calls through the system from evacuees who traveled to the area. Sprint Nextel’s Florida customers also have been affected, since much of the company’s long-distance traffic is routed through New Orleans, where a long-distance switch located below sea level was flooded and had to be powered down.
OIL
About 10% of U.S. daily consumption, or 2.5 million barrels, is produced or shipped through the Gulf of Mexico. The price of crude, which had already nearly doubled since June 2004, is now flirting with $70 a barrel. The White House has approved a release of crude oil from the Strategic Petroleum Reserve, a move that has historically provided some temporary relief. It’s the Gulf Coast refinery outages that are sending gas prices surging, with most experts predicting increases of 20 to 40 cents a gallon by the Labor Day weekend. That would tip prices over $3 a gallon in many areas.
PORT OF NEW ORLEANS
Katrina’s direct hit on Southern ports roiled several markets, sending trading prices higher on the major exchanges for soybeans, wheat, coffee and steel, among other goods. Barge traffic along the Mississippi is currently shut down, with no tankers or other cargo ships moving in or out of the Port of New Orleans. That’s slowing the 62% of agricultural products that regularly move through the port. Reports said that ships were being secured along the bluffs north of Baton Rouge and that grain exports could be stopped for several days.
COFFEE
More than 1.6 million bags of green coffee, about one-sixth of what the U.S. imports, sit in New Orleans warehouses, where they’re at risk of being ruined by the humidity and wet conditions. September futures contracts jumped 5% after the storm hit. Luckily, however, coffee warehouses are spread throughout the country, including locations in Houston and New York. “Katrina will cause problems for this delivery period, but it won’t affect long-term retail prices,” said Boyd Cruel, an analyst at Alaron Trading.
Source:- www.forbes.com
