The Economic Impact of Hurricane Katrina

September 15, 2005

Santa Monica

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The devastation left by Hurricane Katrina could cost the U.S. economy an initial loss of 400,000 jobs in September and reduce monthly average job creation by 30,000 jobs for the rest of 2005. It could also increase oil by $10 a barrel and lead to a nearly 1 percent decline in GDP growth in the fourth quarter of this year.

But next year, when the reconstruction efforts get into full swing, the recovery will turn things around — adding those 30,000 jobs back per month, easing the price of oil and increasing the GDP by more than a percentage point during the second and third quarters.

These are the preliminary findings of two of the Milken Institute's regional economists who've studied the potential impact of Katrina on the U.S. and Gulf economies.

Ross DeVol, Director of Regional Economics, and Perry Wong, Senior Research Economist, told members of the Milken Institute Associates that based on what has happened after previous natural disasters, the short-term job losses will be made up by increases in such areas as construction once rebuilding is fully under way.

And given the perception by many in the public that the federal government did not respond fast enough to the Katrina disaster, DeVol expects a massive outlay of federal dollars in the rebuilding effort.

"There will be no expense spared," DeVol said.

Insurance payouts for Katrina are expected to be the most for any hurricane cleanup in U.S. history — anywhere from $20 billion to $45 billion. The federal government could end up spending as much as $150 billion.

One of the key questions is how to rebuild New Orleans, which is dependent on tourism and lacks the knowledge-based workforce that is crucial for economic growth.

"It's not just the rebuilding that's important, but what kind of rebuilding we do," said Wong. "The danger is if we try to put it back just as it was."

Update: After Hurricane Rita hit the Gulf Coast in September, DeVol and Wong updated their findings about the impact of the two hurricanes on the local and national economies. Their findings can be found in the slides (above), but here is a summary:

Delayed economic activity caused by the massive evacuations in the Houston region, combined with the economic dislocations in the affected area, will reduce real GDP growth by an additional 0.2 percentage point in the third and fourth quarters of 2005 beyond the 0.5 and 1.0 percent reductions already anticipated due to Hurricane Katrina. Reported job growth will be reduced by an additional 5,000 per month, on top of the 30,000 attributable to Katrina, for the remainder of 2005. The price of natural gas should increase by nearly $1 per million British thermal unit from what would have been expected before Rita hit.

Rita may also delay the reconstruction efforts in New Orleans somewhat because of renewed flooding, but rebuilding will still turn things around in 2006 — adding back 30,000 jobs per month from Katrina, plus another 4,000 per month in southeast Texas and southwest Louisiana. The easing of oil and refined-petroleum-products prices, along with reconstruction, will increase GDP growth by more than a percentage point during the second and third quarters of 2006.

Learn more about the Milken Institute Associates.