Hurricanes Impact National Economy

Beth Ann Bovino
Senior Economist, Standard and Poor's
Thursday, September 29, 2005; 2:30 PM

The immediate impact of Hurricanes Katrina and Rita is clearly demonstrated in the extensive devastation across the Gulf Coast. The recovery and rebuilding efforts will continue for some time in states like Louisiana, Mississippi and Texas. But what about the national economy? What impact will the hurricanes have on gasoline prices? Real estate? The stock market?

Beth Ann Bovino, senior economist at Standard and Poor's was online Thursday, Sept. 29, at 2:30 p.m. ET to discuss the impact of Hurricanes Katrina and Rita on the national economy.

The transcript follows.


Laurel, Md.: It's conventional wisdom that America has many crumbling roads, bridges, water mains and power lines. Do hurricanes and similar disasters provides a worthwhile opportunity for "renewal" the way forest fires do?

Homestead Florida, for instance, (directly hit by hurricane Andrew) has rebuilt a modern downtown.

Beth Ann Bovino: The damage caused by hurricane Katrina was massive with estimates reaching $200 billion. Although the human tragedy is enormous, the impact on economic growth will likely be limited. The disruption from Katrina, and now Rita, will slow growth in the second half of 2005. But the rebuilding should boost the area's infrastructure as well as overall US growth in 2006. While it's too soon to tell how the funds will be spent, the possibility of "renewal" for those areas affected shouldn't be ruled out


COLA: I can imagine this will have a ripple effect over everyone's spending. For example: restaurants have higher heating costs. The food delivery people have higher gasoline costs. Customers have less money for going out. Same applies to retail stores - higher energy bills, higher delivery costs, less customer spending. Seems like you would be hard presses to find an industry not affected. Inflation, anyone?

Beth Ann Bovino: There are several major risks to the US economy from Katrina. The damage to the energy sector is certainly one and will tax household spending. Damages to crude oil production will hurt the US, but this can be offset somewhat by our strategic reserves and imports. The larger risk is the extent of damages to refineries. The U.S. was already operating at close to full capacity. The 5% shutdown in refineries because of Katrina makes it a major problem. As everyone probably knows this by now if they had to fill up their gas tank this week. This will keep gas prices elevated. Heating costs are also at risk, since processing plants and pipelines were also damaged by the storms. We don't have allot of natural gas reserves, which could make this a big issue in the heating season. Energy prices do feed through to other prices which gives companies incentive to pass it through to the consumer. But while this will increase inflation risk, the US economy now spends less on energy products than we did in 1980. The feed-through may not be as significant as you expect


Washington, D.C.: How long do you think it'll be before NOLA gets up and running again??

Beth Ann Bovino: The timing on how long it will be to see New Orleans rebuilt is still guess work. We expected that flood draining would have seen some progress and some repairs to the levies would be somewhat underway. Hurricane Rita pushed the time-line forward. The good news is that Rita missed vital organs. The bad news is that is slowed the recovery for Katrina. The hurricane's combined pushed out the rebuilding to early 2006. While we are seeing some progress being made, much needs to be done before, people can live there safely. Another unanswered question is whether displaced people will want to return.


Potomac Falls, Va.: What will be impact of both hurricanes on D.C. area real estate?

Beth Ann Bovino: The impact on DC area real estate would be essentially zero.


Beth Ann Bovino: I would like to add to those still watching. Standard and Poors hosted a teleconference on Wednesday. Replays are still available. For more information see: 'Hot Topics'


Washington, D.C.: Ms. Bovino, thanks for being here. It seems to me that even before Katrina and Rita, the econ was terrible. The price of everything is ridiculous. I have stopped spending for fear of not being able to afford future expenses (and I make 100k a year!) real estate most everywhere is unattainable except for the wealthy. Gas prices are killing me, for one. now the cost of utilities is gonna strain my family even more.

How is it that nobody is saying that the economy is in serious trouble? Especially now after these storms?

Beth Ann Bovino: Hi,

I think I may have answered few of you questions in earlier comments. particularly the impact of energy on the household pocketbook. But to reiterate, damages to refinery capacity and natural gas production continues to add upside pressure to gasoline prices and heating costs. Real estate is an unrelated but equally important issue. Home prices in the U.S. are rich, driven up in part by historically low interest rates (thanks to the Fed). While home prices on average are rich, we think prices will stabilize unless household income catches up. However, there some metro-areas have prices have run up even more so, and may see some price declines.


Arlington, Va.: Why would the impact on D.C. real estate essentially be zero? Would you mind expanding on your answer? Thank you.

Beth Ann Bovino: To add some more to the last answer. Unless the dislocated households move to the DC region to run up demand for real estate in that area, the impact from Katrina shouldn't be big. There may be some indirect affect on DC real estate through interest rates. As you may be aware, The Fed raised rates on September 20. The statement suggested that the members were concerned with the impact of Katrina on inflation. This suggests they will continue to raise rates, possibly reaching 4.25% for the federal funds rate by year-end. This should reduce demand for homes, likely slowing grow in home prices. Hope this helps


Washington, D.C.: To what extent can we expect the recent hurricanes to generate positive economic effects that partially offset the negative effects? For instance, the recovery effort will presumably generate a great deal of new construction, financing business, and potential for upgraded infrastructure. Much like WWII mobilized a depressed U.S. economy, will the recovery effort inject capital and energy into certain sectors of the current economy? Thanks.

Beth Ann Bovino: Hurricane Katrina will significantly slow economic growth in the second half of the year, with the third-quarter getting most of the hit. But, less than many think, since most activity revives quickly after such an event. Since rescue and repair activities count as additions to GDP, growth in the following quarters offset the hurricane related slowdown. We expect the hurricane should reduce GDP growth in the second half of the year by about 0.75 percentage point, the rebuilding in the subsequent quarters should offset this.


Why is oil coverage in the media so awful?: As one example, I use today's Post article which continues the myth that environmental regs are all that stands between us and free flowing gasoline for all SUVs?

In reality, if you strip away all the red tape, a new refinery would take approximately 5 years to construct and get online. So losing every reg will do nothing until 2010.

This assumes any company will build one. Presently, about half the oil industry has publicly endorsed the concept that we are no more than 20 years from peak global production of oil, and likely sooner. Chevron-Texaco is the leader of that half. So building refining capacity for a maximum 14 year use is rather silly, and will barely make back set up costs.

The reality is simple. There is _nothing_ anyone can do for the next five years. We were already at 95% capacity before the loss, and were still running a production deficit. All shut-in capacity is thus a deadweight permanent best we can return to near equilibrium without making it up. Now add to that the fact we have to pay back the tankers of gas from Europe, and that we have to re-set our present refining capacity for winter fuel oil, and prices _are_ going up (not if).

Oh, and don't forget the other unreported story...that Sweet-Light Crude (easily refined) already peaked globally, and all of our refineries will need to re-tool to process sulfur laden oil just to keep up at present rates of production.

Why is none of this easily found stuff reported?! We're not talking loony environmentalist stuff...this comes from Oil Industry publications. None of this is a big secret.

Beth Ann Bovino: I mentioned in an earlier comment that refineries were already close to full capacity. It has been a few decades since a refinery has been built, and so has already been a concern before Katrina came along. Shut-downs of refinery capacity because of the hurricanes made a big problem even bigger. It still is too early to tell, but it looks like refineries weren't as damaged as first feared. This suggests that they may be back in production by year-end. But despite Katrina, refineries are operating close to full capacity and will continue to be an issue.


Melbourne, Fla.: Didn't anybody check a FEMA map before building on the coast? We only looked at the Melbourne area and the Daytona Beach area to purchase a home because they are solidly 18 foot above sea level. Naples, Miami, Biloxi, New Orleans are all in FEMA map flood areas. Why should the taxpayer pay for people to rebuild in areas that will flood? Why would anyone WANT to build there?

Beth Ann Bovino: Many of the areas you mentioned are at risk, and flood insurance does give people wrong incentives for building. But note, FEMA maps did not have downtown New Orleans, or anything behind the levies, as a flood plain.


Beth Ann Bovino: Thanks for your questions. If you would like to learn more about the impact of Katrina, please see: 'Hot Spots'


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