Despite storms, US economy still steaming ahead, no recession looms, UNC expert says

10/18/05

CHAPEL HILL -- Despite recent major buffets from bad weather, the U.S. economy keeps steaming ahead strongly, University of North Carolina at Chapel Hill business expert James F. Smith says. The hurricanes will have a detrimental effect on the overall economy, but not nearly enough to cause a recession in the next two years as some observers have speculated.

Rated by the Wall Street Journal as the nation's most accurate economic forecaster in three of the past nine years, the UNC professor made his remarks in the latest issue of the Business Forecast, a newsletter he writes for UNC's Kenan-Flagler Business School. "On August 29, Hurricane Katrina slammed into the Louisiana coast with 145-mile per hour winds and dealt huge destruction to New Orleans, Biloxi, Gulfport, Pascagoula, Mobile and surrounding areas," said Smith, also a fellow in the Kenan Institute of Private Enterprise and director of the institute's Center for Business Forecasting. "Estimates are that the economic impact could easily exceed $100 billion."

But no one really knows what the economic or human costs will turn out to be, he said. At least three years will pass before enough information becomes available for sound analyses. Certain facts are relevant to those analyses, however.

On Aug. 31, the Bureau of Labor Statistics (BLS) released data on metropolitan area employment for July, Smith said. The New Orleans-Metairie-Kenner Metropolitan Statistical Area (MSA) and nearby affected MSAs had 961,000 people employed.

"According to the national BLS report released on Sept. 2, there were 143,283,000 people employed in the entire country in July on the same basis," he said. "This means 0.67 percent of the employed people in the U.S. were employed in the affected areas. If all of them had been recorded as unemployed in the September survey and if the labor force remained unchanged, then the national unemployment rate would rise from 4.9 to 5.5 percent.

"That was still be below average for most of the past 35 years," Smith said.

The area is far more important to three parts of the U.S. economy, he said. The most important is the energy sector. More than 47 percent of U.S. oil and natural gas production is in the part of the Gulf of Mexico where Katrina did so much damage. More than 95 percent of that production was disrupted. While the oil refineries and the very important Louisiana offshore oil port (LOOP) are back in at least limited production, surveying and calculating all the damage to offshore production platforms and underwater pipelines is continuing.

"Secondly, the New Orleans area is the fifth largest port in the world and the biggest in the U.S.," he said. "Most agricultural exports from Minnesota, Wisconsin, Illinois and much of the rest of the Midwest are shipped to New Orleans on barges to be loaded onto huge cargo ships. The Mississippi River was closed to navigation below Natchez, and farmers scrambled to line up storage space as harvest season began. Other exports such as chemicals and machine tools also were heavily curtailed. This will temporarily make the U.S. trade deficit even bigger than had been forecast, which has detracted from economic growth."

Tourism is next, Smith said. About 20 percent of jobs in the New Orleans area were tied to it. New Orleans is the fifth most popular city in the U.S. for conventions, behind Las Vegas, Chicago, New York City and Orlando.

"The biggest economic impact is from gasoline prices," he said. "Pumps all over the U.S. starting showing prices of $3 a gallon for regular or more within a couple of days of the disaster. While this is still less than half the price that consumers in Europe and Japan have paid for years, it comes as a great shock to U.S. consumers."

For lower-income families, many discretionary trips were postponed or not made at all, and fewer trips meant less revenue for retailers.

"The good news will come in the fourth quarter as prices drop dramatically," he said. "This should come just in time to assure a record Christmas shopping season."

House Speaker Dennis Hastert was criticized by many for saying that perhaps it would be uneconomical to rebuild New Orleans where it is now, Smith said. "Of course, he is totally correct. It should eventually become clear that it would be much cheaper and safer to rebuild on higher ground upriver and make the old New Orleans a national historic site.

"It could be a larger version of Harper's Ferry in West Virgina, which also was devastated many times by floods and is today much smaller than it was when it was the primary arsenal of the U.S.," he said. "There is another precedent, as well."

Galveston was the biggest city in Texas and its major port when it was mostly destroyed by a hurricane in 1900 that killed more than 5,000 people and caused the biggest loss of life from a natural disaster in U.S. history. The result was to shift the port 60 miles upriver to Houston. Today, Houston is the fourth largest metropolitan area in the country, and Galveston is a small town.

"The U.S. economy should post new economic records this year and next," Smith said. "We can worry about 2007 when it gets a little closer."

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