Hurricane washes over U.S. economy

Katrina's Wake

September 06, 2005|By Paul Adams | Paul Adams,SUN STAFF

The port of New Orleans, the Mississippi River and critical railroads and highways that fan out from the Gulf Coast are the arteries of the U.S. economy, maintaining the flow of Midwest grain to the world and supplying raw materials that find their way into just about everything Americans buy.

In one day, Hurricane Katrina clotted the whole works, blocking farmers from the world market, depriving steel makers of critical materials, shutting chemical plants that feed the nation's plastics industry and generally disrupting the supply chain for dozens of industries.

The pain - in the form of higher prices for goods and lost jobs - will extend far beyond the breathtaking increases in gasoline prices that are making headlines. Like the storm's human toll, Americans can expect the financial toll to linger long after the streets of New Orleans are swept clean of water and debris, economists said.

"The real problem is the fact that this is a choke point in the economy, and that's become very apparent," said Peter Morici, a business professor at the University of Maryland, College Park. "This is not your typical hurricane."

Added to the damage to the nation's oil and gas industry, economists say, the supply disruptions and their ripple effects could easily cut economic growth by 1 percentage point, from about 3.5 percent to 2.5 percent.

In a roughly $12 trillion economy, that translates into about $120 billion of economic activity that will be lost next year and in subsequent years unless the economy grows so fast that it is able to make up the difference.

The dual prospects of inflation and muted economic growth could prompt the Federal Reserve's Open Market Committee to take a different view of interest-rate policy as it prepares for its Sept. 20 meeting. The Fed has been steadily raising rates in the past couple of years to ward off inflation.

On top of the reduced growth, the forecasting firm Risk Management Solutions estimates the damage to homes, businesses and infrastructure at more than $100 billion, which would make Katrina by far the costliest natural disaster in U.S. history. Insurance industry experts and economists estimate that about $30 billion of the losses are covered by insurance.

"We will have the worst of both worlds," said Anirban Basu, a Maryland economist and head of Sage Policy Group. "We will have less output, and whatever output is available will be at a higher price."

Maryland might be spared the worst of the crisis because the state has few of the manufacturing operations that are likely to be hit by supply disruptions from the hurricane, Basu said. But the state will feel the disruptions in myriad other ways.

The trouble starts with oil and gasoline.

More than half of the natural gas and 70 percent of the oil normally produced in the Gulf of Mexico remained cut off yesterday, according to the U.S. Minerals Management Service. About 30 percent of U.S. oil output and 24 percent of its gas supply come from the gulf.

With much of the nation's refining capacity also damaged, transportation will undoubtedly be more expensive. Just about everything people buy must be transported, so that means higher costs for goods.

Even when gasoline production returns to normal, many economists forecast, prices will stay higher than they were before the storm. Morici and others say that spells trouble for the Big Three automakers in the United States, whose strategies have revolved around large cars, trucks and sport utility vehicles for the past decade.

Chrysler ads routinely boast of the powerful hemi engines in the carmaker's best-selling models. General Motors, which recently shut its van assembly plant in Baltimore but still makes transmissions here, continues to push its SUV line.

GM, called a candidate for bankruptcy if it can't reduce its health care costs and improve sales, has lowered its sales and earnings projections and blamed a dip in sales last month in part on the hurricane.

Maryland is more affluent than the rest of the country, Basu said, which means that the state's residents are better positioned to handle higher fuel costs. But some economists say high gasoline prices could affect housing prices in outer suburbs, which typically require longer commutes to jobs.

Employers also are feeling the pinch of higher transportation costs, in the form of fuel surcharges from the truckers who carry their goods. Many have absorbed those extra costs for months, but most are starting to pass those expenses on to consumers.

"There's no question that we see that in the fuel surcharges from our carriers," said Newth Morris, president and owner of Dixie Printing and Packaging in Glen Burnie. "It's getting to be 20 to 30 percent of the bill. This was going on before the mess with Katrina."

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