NEWS RELEASE

Office of External Communications

Houston, TX 77204-5017 Fax: 713.743.8199

FOR IMMEDIATE RELEASE
November 10, 2005

Contact: Angie Joe
713.743.8153 (office)
713.617.7138 (pager)
ajoe@uh.edu

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.

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