Hurricane Rita to Compound Katrina's Dampening Impact on Economy, but Recession Still Unlikely

The following are the latest findings from economists at the Milken Institute who’ve studied the potential impact of the Katrina and Rita hurricanes on the U.S. and Gulf Coast economies:

The U.S. economy avoided a double blow because Hurricane Rita turned away from the Houston area, sparing its refinery capacity. Early indications are that despite damage to southeast Texas’ and southwest Louisiana’s petroleum refineries, most should be back online within two to four weeks.

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.

Ross DeVol, Director of Regional Economics, says that based on what has happened after previous natural disasters, the 400,000 short-term job losses in the Gulf will start coming back as early as next month. And the monthly loss in U.S. job creation – because of Katrina’s and Rita’s impact on the rest of the U.S. economy, including higher gasoline and natural gas prices – will be made up by an increase in employment in such areas as construction once rebuilding is fully under way. His insights are based on extensive research and knowledge of the economic impacts of natural disasters and terrorist attacks, such as 9/11.

“Rita certainly didn’t help the economic outlook, but the U.S. economy will weather this storm without a significant dent in job creation and overall growth for the rest of 2005,” DeVol said. “With the federal government even more likely to spend billions of dollars to rebuild the entire region, the reconstruction efforts will act as a stimulus to the economy in 2006.”

Insurance payouts for Hurricane Rita are expected to be less than $5 billion. The main risk to the economy stemming from Rita is that natural gas prices will go higher and stay there for a longer period of time, increasing feedstock and heating bills this winter.

For more information, visit www.milkeninstitute.org.