ECONOMIC FALLOUT FROM KATRINA, RITA
NOT OVER YET, SAYS UH’S BARTON SMITH
HOUSTON, November 10, 2005 – Residents of the Gulf Coast
states are not the only Americans affected by Hurricanes Katrina
and Rita. Households as far away as Maine and Minnesota are struggling
with the aftermath of these two powerful natural disasters.
During his annual economic forecast symposium, Barton Smith, University
of Houston professor of economics, discussed the economic implications
of Katrina and Rita, concluding that these two natural disasters
will wreak more havoc than any previous U.S. natural disaster because
of the destruction to this nation’s port and energy infrastructure.
“The economic impact has barely been felt yet,” he
said. “High gasoline prices are going to prove to be a mere
inconvenience compared to high heating costs this winter. The consumer,
already hit by rising interest rates, reduced employer contributions
to health care and worries over the viability of pension plans,
will face a major hurdle in paying for home heating costs that in
many regions will be double last year’s high levels.”
Smith points out that these burdens will reduce the real income
consumers will have in buying non-energy products and services.
“One should not be overly encouraged by the strong growth
in real-dollar GDP reported for this year’s third quarter.
Consumer spending often spurts just prior to and immediately after
hurricanes. In general, past hurricanes have had minimal effects
upon the overall national economy, but energy shocks have always
had major effects,” he said.
Smith told his audience that the impact of a half million lost jobs,
while devastating to the regions involved, is relatively small for
the overall national economy. But the sharp increase in natural
gas prices will affect all Americans, most particularly the large
population centers in the Midwest and along the East Coast.
The director of UH’s Institute for Regional Forecasting addressed
more than 1,000 business and civic leaders at the Hyatt Regency
Downtown at his program, “The Aftermath of Katrina: Where
Do We Go From Here?” He warned his audience that the fallout
from these two hurricanes will not likely be fully felt until the
first quarter of next year, though he emphasized that next year’s
economic performance will also greatly depend upon the decision
by the Federal Reserve Bank (FED) to raise interest rates. An overreaction
to the short-term inflationary pressures of this fall’s disasters
could lead the FED to raise rates much too high, especially given
that energy cost inflation itself will be cooling the economy down.
“For the next several quarters, the national economy will
need little additional help from the FED in slowing down to a sustainable
level,” Smith said. “Excessive monetary restraint at
a time in which consumers will be simultaneously taking a significant
hit to their real incomes could precipitate a ‘near recession’
experience.
“Houston’s economic future will be somewhat different,
however,” he said. “For the next year and a half, Houston
will benefit from growth in upstream (exploration) energy sectors,
but will be negatively impacted by the national economic slowdown.”
He went on to say that Houston’s economic future will see
a continuing moderate improvement, characteristic of the gains the
region has been experiencing since late spring. But job growth will
not come close to approaching the high levels experienced in 1997
and 1998 because that type of growth requires all engines of the
economy to be at full throttle – upstream energy, downstream
energy, non-energy and international trade.
“Only upstream energy will be booming,” he said. “Downstream
energy is permanently stuck in neutral and the rest will have to
wait until the dust clears on the national economy, which is not
likely to occur until 2007.”
Smith also talked about the lessons that Houstonians and all Americans
should have learned from Katrina and Rita, but probably did not.
Included in this list is the need to pay now for rebuilding rather
than passing the costs on to future generations, to re-examine a
federal budget in which progressively fewer dollars have been spent
over the past four decades on social infrastructure, and to get
serious about producing a more diversified energy base.
“The U.S. is extremely dependent not only upon foreign suppliers
of energy, but also on its own Gulf Coast region,” Smith said.
“The former is highly susceptible to political unrest; the
latter to major weather events.”
Ultimately, however, Smith sees high energy prices as the solution,
not the problem. With prices this high, alternative energy sources
finally become economically competitive, conservation becomes an
economic necessity and exploration will produce more energy in the
years ahead. It is just going to take time for it all to happen,
he said.
About the University of Houston
The University of Houston, Texas’ premier metropolitan research
and teaching institution, is home to more than 40 research centers
and institutes and sponsors more than 300 partnerships with corporate,
civic and governmental entities. UH, the most diverse research university
in the country, stands at the forefront of education, research and
service with more than 35,000 students.
For more information about UH visit the universitys Newsroom at www.uh.edu/admin/media/newsroom.
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