By Bianca Shreeve, USCM Intern
September 12, 2005

While the recovery effort continues in the Gulf Coast, experts are already beginning to assess Hurricane Katrina's economic impacts. Global Insight, the economic forecasting firm that prepares the Metro Economies series for the Conference of Mayors' Council for the New American City, conducted a webcast September 8 discussing the economic effects from the country's most devastating natural disaster.

Nariman Behravesh, Chief Economist for Global Insight, said that while initial figures are somewhat uncertain, the total cost of Katrina will easily exceed $100 billion, 0.8 percent of the nation's GDP. Exact estimates are still difficult to determine, considering that damages to the economic infrastructure caused by the hurricane are greater than any other storm in U.S. history.

Global Insight predicts that the New Orleans metro area will experience $7.5 billion in loss of economic output for 2005 and $7.3 billion in 2006, not accounting for damages to buildings and infrastructure. In 2004, New Orleans was the 47th largest metro area in the nation, accounting for 31 percent of Louisiana's state output and 0.4 percent of the national economy.

According to Global Insight, 90 percent of the structures on the costal areas of Mississippi and Alabama have been destroyed, leaving areas such as Biloxi and Gulfport with extensive damage. The repercussions are significant for these areas whose economies rely primarily on tourism and transportation.

Katrina caused significant disruptions to activity in the ports along the lower Mississippi River from New Orleans up to Baton Rouge, although it appears that the infrastructure is largely intact. The hurricane also damaged energy infrastructure along the Gulf Coast, which will affect the national economy. Kevin Lindemer, Executive Managing Director of Global Insight predicts that due to the storm, pressure on both supply and demand for gasoline could cause consumers to spend 37 percent more per gallon this December compared to the year before. Low levels of natural gas, along with higher prices for oil, could also mean a possible 30-40 percent increase in heating bills during the winter months.

While the nation's GDP is temporarily impacted, post-Katrina forecasts are similar to pre-Katrina predictions of continued economic growth. According to Global Insight, the real GDP growth rate for the current quarter is about 0.5 percent less than last month's forecast, with economic recovery beginning in early 2006 due to increased government spending for reconstruction and a decline from the current high gasoline prices. Similarly, the Congressional Budget Office reported a possible reduction of growth between one-half and one percentage point for the remainder of 2005. Behravesh expects similar worldwide impacts. "The major transmission mechanism of the Katrina shock to the rest of the world will be through higher oil prices and weaker U.S. growth."

Unemployment rates are also of growing concern. In the New Orleans metro area alone, as many as 311,000 jobs are expected to be lost during the fourth quarter, which could result in temporary unemployment rates well in excess of 20 percent.

Short and long-term reconstruction efforts will contribute to continued growth of the U.S. economy, Global Insight predicted. Long-term turnaround in New Orleans will depend on the condition of major tourist attractions and the amount of people returning to the city. Ultimately, Global Insight projects continued growth in the U.S. economy, particularly as ongoing efforts to rebuild generate more economic activity, with the U.S. economy returning to its pre-Katrina growth path by the end of 2006.