Hurricane washes over U.S. economy

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."

Katrina also made it harder to get things from one place to another. Midwest farmers send about 60 percent of their crops down the Mississippi to points around the world. Grain prices have fallen as a result of fears that what farmers produce won't be able to reach market.

The storm also disrupted cotton and sugar cane crops in the Southeast and delayed planting in Florida, which could result in tighter supplies of fresh produce for the East Coast this winter. That could mean higher prices for food in Maryland.

An as-yet-unknown amount of damage to rail lines in the gulf region will make it more difficult to move goods, even as the nation's railroads are under stress because of a lack of engineers and railcars. Those carriers compete for cars and labor with railroads serving Maryland and the port of Baltimore.

Also unknown is how many bridges - which take weeks or months to rebuild and must be made to order - are out because of flood damage around New Orleans. With railroads and truck routes impaired, getting building materials to flood-ravaged areas will be harder, further driving up their cost.

Housing costs are expected to climb as a result of higher prices for building materials and labor. The port of New Orleans is a critical hub for shipments of cement - which was near record high prices before the hurricane - and other building materials.

Lumber prices have climbed by double-digit percentages since last week, Maryland builders say, and increases for plywood and oriented strand board have been even bigger.

Demand for labor to rebuild storm-damaged areas - including about 200,000 destroyed homes in New Orleans - will strain homebuilders nationwide, economists say. The effect on the supply of housing and prices is anybody's guess. Borrowing against rising home values has helped fuel consumer spending in recent years, and some see that as threatened.

"We have the worst of both worlds in the sense that supply is going down for these materials and the demand is going up," said Robert J. Trent, an associate professor of management at Lehigh University.

The gulf area also is home to dozens of chemical plants that provide the raw materials for plastics that go into everything from cars to food packaging. Even those that didn't suffer flood damage are facing a shortage of natural gas, which is the feedstock for most of the plastic produced in the United States.

The chemical industry grew up along the Gulf Coast because of its proximity to key sources of natural gas, many of which were temporarily wiped out by Katrina. No chemical plants have been built in years, making obtaining alternative supplies difficult for industries that depend on plastics.

Baltimore-based DAP Products Inc., which relies on such chemicals to make caulk and other products, said prices for some supplies have doubled in recent months. Katrina is expected to make things worse.

Other big industries are facing similar crises. Steel producers that rely on hydrogen and other supplies that come from the gulf are struggling to find alternative supplies. Air Products of Lehigh Valley, Pa., lost a critical hydrogen plant in New Orleans, forcing Steel Dynamics Inc. in Fort Wayne, Ind., to suspend new orders for certain steel products that require hydrogen for finishing.

Economists don't expect a recession. Economic growth is expected to slow considerably. How far the pain spreads will depend on how long the crisis in the gulf lasts.

"The economy had reasonable amounts of momentum before the storm, and that momentum should allow us to avoid a recession any time soon," Basu said.

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