Storm's Economic Shock, Job Losses Likely to Rival Worst
Saturday, September 3, 2005
Hurricane Katrina, by forcing an exodus of workers and families from New Orleans and surrounding areas, appears likely to rank alongside Sept. 11, 2001, and the Arab oil embargo of 1973 as one of the nation's most serious and sudden economic shocks -- particularly in terms of job losses -- in recent memory.
Before the storm, the Mobile, Ala., Biloxi, Miss., and New Orleans metropolitan areas supported about 1 million non-farm jobs, with about 600,000 of them in New Orleans. Analysts at Stone & McCarthy Research Associates estimated yesterday that the storm has wiped out several hundred thousand jobs along the Gulf of Mexico coast, at least temporarily.
"It seems almost as if a nuclear weapon went off in New Orleans," said George Friedman, chairman of Strategic Forecasting Inc. "The displacement of the population is the crisis that New Orleans faces. . . . The physical and business processes of a port cannot occur in a ghost town, and right now, that is what New Orleans is."
Yesterday, the people remaining in the city were predominantly emergency aid workers, law enforcement officers and people waiting to be evacuated. The workforce that once operated the region's oil rigs, refineries, ports and other businesses is now widely dispersed. The result could be a labor force crisis that delays the eventual economic recovery.
In comparison, in recent years, the biggest one-month drop in the U.S. national job-count occurred when 377,000 employees lost work in October 2001, after the Sept. 11 terrorist attacks. And the last time more than 600,000 jobs were lost nationally was in December 1974, during the recession that followed the 1973 oil embargo.
Soon after Katrina hit, surging gasoline prices were already prompting consumers to curtail their spending on other items. That may cause businesses to cut back on hiring and investment, probably slowing economic growth in coming months. The slump's severity will depend critically on consumer psychology, analysts said yesterday: A panicky response to climbing gas prices would help drive them up higher, making things worse.
"This disaster is unleashing the type of energy supply shock that we had viewed as the economy's greatest vulnerability," William C. Dudley, chief U.S. economist for Goldman, Sachs & Co. said yesterday.
Katrina's impact on the national economy will worsen if rising gas prices cause employers to hold off hiring or to cut jobs because of slowing demand, weakening the national labor market.
"The worst-case scenario is if the drop in consumer spending leads to sufficient job losses to push the unemployment rate materially higher," Dudley said.
The hurricane hit as the U.S. economy was rolling along at full steam, little affected by oil prices that had roughly doubled in the past two years to around $65 a barrel and gasoline prices that had topped $2 a gallon nationally. Consumer and business spending was rising and employers were adding jobs at a healthy clip. The Labor Department reported yesterday that the nation's unemployment rate fell to 4.9 percent last month, the lowest level in four years.
Just a week ago, Federal Reserve Chairman Alan Greenspan said the economy had thus far weathered "reasonably well the steep rise" in energy prices over the past two years.
By yesterday, as gas prices exceeded $3 a gallon in many areas, images of motorists waiting in line to buy gas conjured memories for many adults of the worst times in the 1970s, when sharp reductions in oil supplies helped send inflation and interest rates soaring, contributing to deep recessions.
Forecasters do not foresee a replay of such turmoil today, largely because the economy is much more energy-efficient than three decades ago, and is based more on providing services and less on manufacturing products. The country requires half as much oil to produce a dollar's worth of output as it did in the 1970s.
Moreover, the oil shocks of the 1970s came about when suppliers in the Middle East turned off the taps for political reasons. The current loss of supply resulted from hurricane damage that will be repaired.
Meanwhile consumers have already started altering their routines in response to skyrocketing gas prices. A CBS Poll conducted after Katrina struck and released Thursday found that 70 percent of Americans said they are driving less because of higher gas prices and nearly half said they have cut back their other household spending.
One concern for many economists is the vulnerability of consumer psychology if gas prices keep climbing. If motorists worry that gas may be unavailable and start hoarding or topping off their tanks frequently in anticipation of rising prices -- as they did during the gas shortages of the 1970s -- they will boost demand and push prices higher.
Many economists expect Katrina's effects to slow economic growth for several months but to be followed eventually by a reconstruction boom in the Gulf Coast states. Under this scenario, energy production is restored, workers return and gas prices recede.
But the economy remains vulnerable, said Ethan Harris, chief U.S. economist at Lehman Brothers Inc., in an analysis for clients. "The big risk is a prolonged disruption to the energy markets: a long delay in recovery of the refineries or extended panic behavior on the part of consumers."
And the National Weather Service forecast three to five major hurricanes between August and November -- of which Katrina was the first.