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Economic Impact

Damage to Economy Is Deep and Wide

Published: August 31, 2005

As Hurricane Katrina plowed through the Mississippi River basin, shutting down ports, flooding cities and cutting power lines, economists warned that it was likely to leave a deeper mark on the national economy than previous hurricanes because of its profound disruption to the Gulf of Mexico's complex energy supply network.

"The typical pattern with a natural disaster like this is that the regional economy gets clobbered but you can barely see it in the national statistics," said Nariman Behravesh, chief economist at Global Insight in Lexington, Mass. "This time it is very different because of the impact on the energy infrastructure."

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Peter Cosgrove/Associated Press

This oil platform ripped from its mooring in the Gulf of Mexico came ashore at Dauphin Island, Ala.

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Stephan Savoia/Associated Press

The Brighton Exxon service station in Brighton, Mass., stopped selling gas when it could no longer compete with lower prices at other stations.

Already, it is clear that much of the economic activity in the gulf region has indeed been clobbered. New Orleans, home to nearly a million people, is under water. By yesterday morning an estimated 2.7 million residents in Alabama, Florida, Louisiana and Mississippi had reported power failures, with many expected to be without electricity for weeks. Conventional and mobile telephone service along the Gulf Coast suffered from severe disruptions from flooded call-routing equipment and damaged cellular towers.

Businesses across the Southern interior ground to a halt as then storm affected the region's transportation network and power grid. Since last Thursday, AirTran, a low-fare airline, has canceled 195 flights because of Katrina, including 18 cancellations yesterday.

Casinos were destroyed in Mississippi and New Orleans; tourism is not expected to revive for months. Grain shipments face serious delay: Bunge, the world's largest oil-seed processor, evacuated a huge soybean operation in Destrehan, La., its main export terminal in the United States. Food exports and imports that normally flow in huge quantities through regional ports, roads and rail lines are likely to face major disruptions for weeks, if not longer.

Economic activity is expected to resume in the next few days and weeks in all but the worst-hit locations. But what worries most economists is Katrina's ripple effect on energy prices.

A spike in the price of gasoline just ahead of Labor Day will force consumers to dig deeper into their wallets on one of the busiest driving weekends of the year, providing both a real and psychological blow to spending on other goods and services. And a sustained rise in the cost of energy could substantially slow economic growth.

Across the storm's path, it has been difficult to come to grips with the extent of devastation. Ed Preau, assistant secretary for intermodal transport at Louisiana's transportation and development department in Baton Rouge, said he assumed that ports east of New Orleans remain closed because they are under water. But he said he could not be sure because "I have no contact with anybody in the 504 area code."

Yesterday, the Coast Guard barred all traffic except barges and tugs from the Mississippi delta to the Arkansas state line, a spokesman said.

While all estimates at this stage are just guesses, privately insured losses could reach $15 billion or more, according to Robert P. Hartwig, chief economist of the Insurance Information Institute in New York, making Katrina the most expensive hurricane for the insurance industry since Andrew hit Florida in 1992. Other analysts estimated insured losses up to $25 billion.

Damage from flooding, which private insurers do not cover, could easily double the figure.

But economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on measured growth over the next few months as vast resources from around the country are channeled to rebuilding.

Even as shuttered businesses will temporarily add to joblessness, the huge reconstruction effort is expected to create jobs in construction and a host of related sectors. Insurance companies and the federal government will pick up a significant portion of the cost.

"Longer term, in the wake of a number of hurricanes there is actually an increase in measured output that even shows up at the national level, because there is a whole bunch of rebuilding activity," said Stephen P. A. Brown, director of energy economics at the Federal Reserve Bank of Dallas. "Though in some sense it would be easy to argue that we have been made worse by the hurricane, the process of rebuilding of property contributes to an increase in output."

But it will take a while to get to that stage. With buildings damaged, roads closed, power lines down and telephone service severely crimped, restoring basic services is the first order of business. Even cellphone service in the New Orleans 504 area code, for example, may not come back easily.

Still, at the national level, the already stressed energy supply system is considered the most critical sector to watch. "The economic impact of delays in getting exports of grain out is not as large as the impact of delays in getting oil in," said John Robertson, an economist at the Atlanta Fed.

According to Mr. Behravesh at Global Insight, in a best case outlook, with oil and natural gas supplies falling by 2 percent or less, oil prices are likely to stay at $65 to $70 a barrel for the next couple of weeks while gasoline prices climb to $3 a gallon for a couple of months. He estimated that course of events would shave no more than half a percentage point from output growth in the fourth quarter.

Micheline Maynard in Detroit and Jad Mouawad and Vikas Bajaj in New York contributed reporting for this article.