Jubak's Journal
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A double hit to the Gulf -- and the economy
Katrina and Rita left plenty of physical damage. But it's the lingering psychological damage that could determine whether we tip into a recession.
By Jim Jubak
The U.S. economy has dodged a bullet.
After taking dead aim at the heavy concentration of oil refineries and chemical plants from Houston to the Louisiana-Texas border, Hurricane Rita delivered only a glancing shot. The physical damage from Hurricane Rita following the devastation of Hurricane Katrina will not be enough to push the U.S. economy into recession.
But that doesn't mean the U.S. economy is completely out of danger. Recessions are as much psychological as economic events. They're caused when people -- consumers and CEOs alike -- decide to stop spending because they feel the future is dark and dangerous.
We'll only know the full extent of the psychological damage to the economy as the efforts to rebuild unfold over the next few months.
If, come December, consumers and CEOs are looking at the depressing effect of higher prices for gasoline, heating fuels, food and other basic goods, and if we're still seeing news stories and pictures of refugees in tents, then Katrina and Rita will have indeed delivered the kind of psychological wallop that produces recessions.
Economists now estimate that the destruction caused by the two hurricanes will be enough to send U.S. economic growth in the fourth quarter of 2005 down to just 2%. That compares to the economy's strong 3.6% growth in the first half of the year. Before the storms, economists had been projecting growth of 3% to 4% in the last quarter of the year.
Hurricane math
But economists note that in prior natural disasters, the immediate drop in GDP -- when economic activity in the devastated regions decreases -- is followed by a boost as rebuilding starts.
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Do the math yourself: Katrina removed $50 billion in annual output from the national economy by putting New Orleans out of action, but the federal relief and rebuilding effort is now pegged at $200 billion to $250 billion. Check out the spending pattern after 1992's Hurricane Andrew: About 1% of the obligated federal funds were spent in the first fiscal year (which ends on Sept. 30), and 70% were spent by the end of the second fiscal year. That means 2006 is likely to see a big boost from post-storm spending.
It's not hard to figure out which storm caused more economic damage. Estimates for insured damage from Katrina are around $35 billion; for Rita, early figures put damages at about $5 billion.
If you look beyond those numbers to try to assess the damage to the nation's stressed industry infrastructure, I'd call the primary damage from Rita wider, but not as deep, as the damage caused by Katrina. That's because the second hurricane lashed a region that includes Houston, the fourth largest metropolitan area in the United States and which accounts for roughly 2%, or about $250 billion, of the national economy. That regional economy includes about half of the country's chemical industry and 15 refineries, which account for 23% of U.S. refining capacity.
Contrast that to New Orleans, a $50 billion metropolitan economy, and Gulfport, Miss., a $10 billion economy. With nine major refineries, the area represents the second-largest concentration of refining capacity, next to the Houston/Gulf Coast region of Texas.
In New Orleans, five of the area's refineries were still out of operation three weeks after Katrina passed, because flooding made it difficult to reach the plants to assess damage and then to restart operations. And the plants remained dormant because electric power still hadn't been restored and because pipelines to get oil in and out of the refineries were either not running at all or running below capacity.
And, of course, new flooding that Hurricane Rita brought to the New Orleans area hasn't made it any easier to get these plants up and running.
Comparing the ports of Houston and New Orleans produces roughly the same conclusion: Houston is the busier port, but the damage at New Orleans runs deeper. The port of Houston is the largest oil-tanker port in the U.S., with about twice the annual volume of No. 2 New Orleans. Together the two ports account for about 20% of all U.S. petroleum deliveries. It looks like Houston's petroleum docking, storage and transportation systems suffered little damage from Rita and will be back in operation quickly.
Recovery at the port of New Orleans has not been as rapid. Yes, on Sept. 13, the Lykes Flyer became the first ship to unload at the port since Hurricane Katrina struck. That was encouraging news, because some experts had estimated that it would be six months before the port reopened for business.
But the news isn't nearly as good as it seems. The Lykes Flyer unloaded containers -- truck-trailer sized boxes -- of plywood and coffee from the ship by crane and put them on trucks for transport along recently reopened highways. But this kind of cargo is easier to unload and transport. Resumption of grain shipments, where New Orleans plays a critical role for U.S. farmers, will lag until grain elevators are back in operation and barges have a place to unload. And, unfortunately for energy prices, there are few ports that can pick up significant slack in petroleum shipments.
An attitude adjustment
Now let's shift from the physical damage done by the storms to the hurricanes' psychological impact.
Even before Katrina and Rita there was evidence from Wal-Mart Stores (WMT, news, msgs) and Dollar General (DG, news, msgs) that lower-income consumers, at least, had started to cut back on their spending because of higher gasoline prices. And that was before pump prices spiked to near $4 a gallon over the Labor Day weekend before settling back toward $3.50.
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