Special Edition Market Update: Potential Economic Impacts from Hurricane Katrina

It may be months before definitive estimates of the impact of the recent hurricane on the U.S. economy become available, but some preliminary observations can be made:

• The area directly affected by the hurricane represents between one-half and one percent of annual U.S. economic activity.

• While it appears that the ports of New Orleans and Gulfport, Miss., sustained some damage, early reports indicate that the infrastructure for most ports in the region survived largely intact.

• Import activity has already begun to be diverted to other ports, particularly to Houston, Lake Charles and Pensacola. Once the Mississippi River is fully open to commercial traffic (it is already open on a limited basis during daylight hours), the Port of Baton Rouge and other river ports will become available to handle exports.

• While overall U.S. economic growth is expected to slow in the third and fourth quarters of 2005 due to the residual impact of the hurricane, that likely will be offset in 2006 as rebuilding adds to the pre-hurricane forecasts of economic growth next year.

The U.S. transportation system has been affected by the hurricane in a larger way than just local disruptions. In addition to reduced north-south transport on the Mississippi River in the short run, New Orleans sits astride a major east-west transportation corridor for both rail and highway transport. With a number of routes and reload facilities damaged or destroyed by the storm, both rail and truck traffic has experienced delays. This puts a strain on the nation's capacity to move goods, as trailers and railcars are tied up longer.

In addition to the direct impact on energy markets, the loss of a major U.S. hydrogen-producing facility in New Orleans may have some impact on the consumer packaging market, since hydrogen is a necessary input in the manufacture of HDPE (high density polyethelene) resin used to make plastic beverage and other containers. (The majority of milk purchased in the United States is packaged in half-gallon and gallon plastic containers.)

For the agriculture and food sector in particular, New Orleans was the top port for U.S. agricultural commodity exports. In the very near term, the inability to export may result in increased availability of domestic grains and oilseeds. However, the fall harvest has not yet fully begun in the grain belt, and as port facilities on the lower Mississippi River become operational later this month and next, this should reduce the overall impact on agricultural commodity markets this coming year. Key agricultural imports for ports in this region were coffee, sugar and fruit.

In addition to some disruption to raw sugar imports in the short run, two major domestic sugar refineries are off-line at this time. The U.S. Department of Agriculture (USDA) has already acted to increase both the FY 2005 and 2006 Overall Allotment Quantities for domestic sugar designed to increase domestic raw sugar production and the tariff-rate quotas (TRQ) for imports of refined and raw sugar. (For more information on sugar, click here.)

The federal government has been quick to take strategic actions to minimize the economic impacts of the hurricane, including tapping the strategic petroleum reserves (as have several foreign governments) and authorizing over $61 billion in disaster aid already. However, this will come at a cost to the budget deficit. There is expected to be some impact in this government fiscal year, which ends September 30th, but the largest impact will be in the coming fiscal year. This event could increase the deficit by $40 billion to $80 billion in FY 2006, which may increase pressure to reduce the deficit in the coming year.

Posted September 12, 2005