The Non-Existent Katrina Effect

Originally published New Orleans CityBusiness (article)

May 2007

Immediately after Hurricane Katrina, national economists gave their long-term outlook for the nation’s economy as a massive recovery and rebuilding effort ramped up on the Gulf Coast. Now with the White House’s often-touted figure of $110 billion in federal dollars coming into the region, along with an estimated $40 billion from insurance payouts, many economists are wondering why these mammoth payments haven’t made a bigger dent in national and regional economies.

“It would not be that far off from adding a whole new state into the national economy — a small state, but it is that significant. It’s spending that wasn’t there before,” said Douglas Woodward, a research director and professor of economics at the University of South Carolina, who has researched the effects of Hurricane Hugo and other national disasters on state and local economies.

In particular, some national economists are curious as to why this massive spending hasn’t had a larger positive effect on Louisiana.

“This far out in South Carolina that recovery money had already been spent,” Woodward said. “If you had asked me after Katrina where would we be in April of 2007, and I did say this to the press, that the area would be in a massive boom. Because that’s what these disasters do; it’s predictable. You should be seeing infrastructure being rebuilt, schools being rebuilt, construction cranes everywhere, labor shortages, construction material prices going up.”

Federal and insurance recovery and rebuilding dollars spent after Hurricane Hugo, which struck South Carolina in 1989 and caused an estimated $13.6 billion in damages, actually pulled South Carolina out of a recession.

“Hurricane Hugo was obviously much smaller than Katrina in terms of the impact,” Woodward said. “We noticed a positive change in the gross state product and personal income in South Carolina, and there was a small perceptible increase in GDP (gross domestic product) across the country. And that was the same with Hurricane Andrew. It takes a while, but once the spending kicks in that’s what you would expect to happen.”

Many economists agree it takes nearly six months after a disaster for the boost in spending to hit the economy. Some say the initial Katrina spending may have actually softened the blow of the housing market slowdown on the nation’s economy.

Katrina ‘not normal’

While indicators that monitor individual’s spending correlate with tried-and-true predictions, such as Personal Income numbers and State Sales Tax Collections others do not including the ones that point to Federal spending for infrastructure repair and rebuilding reinforcing many economists’ notions that “Katrina is not normal.”

Although GDP figures for Louisiana and Mississippi are not available due to a standard lag in computing the numbers from U.S. Department of Commerce, other economic indicators show healthy growth. According to the Commerce Department’s Bureau of Economic Analysis, Louisiana’s personal income in 2006 had the highest growth rate in the nation at 19.4 percent following an 8.7 percent decline in 2005. The per capita increase in Louisiana personal incomes went from $24,664 to $30,952 between 2005 and 2006. The Commerce Department attributes the wide swing to “consequences of the property lost in two hurricanes and the state’s subsequent recovery.” Mississippi’s growth came in at an “average” 6 percent according to the Bureau of Economic Analysis.

According to research released in February by Loren C. Scott, a professor emeritus of economics at Louisiana State University, overall construction employment in the New Orleans region, which covers a seven parish area including several parishes which did not suffer massive housing losses, is still down 7,400 jobs from its pre-Katrina level of 30,000 in August 2005. This is in stark contrast to the construction employment numbers on the Mississippi Gulf Coast and even in Lake Charles, where these numbers are significantly higher than their pre-storm levels.

While construction employment numbers for the New Orleans region increased steadily throughout 2006, they have since leveled off and have started receding. Scott describes these numbers as “plodding”. Most economists describe these numbers as very troubling as they say that construction spending is what normally drives a recovery.

Non-residential and public construction spending nationally was surprisingly strong last year, said Mike Englund, principal director and chief economist for Action Economics, an economics consulting firm located in Denver.

“Those numbers clearly overshot most people’s estimates. But the bulk of the construction spending occurred in Florida, Georgia and Texas. More so than in Louisiana. As people flooded into development communities outside the state, and those resources were strained. Tax dollars were spent to expand highways and roads, hospitals, hotel rooms — it all grew at double-digit rates last year. Some of those numbers were up into the 20 (percent) to 30 percent growth rates.”

The ‘New Orleans Effect’

Some economists built in modifiers for predicting what the “New Orleans Effect” would be on the national GDP, which initially ranged in the negatives for the remainder of 2005 ranging from -.01% to -.08%. Yet nationally, those numbers turned to positives for the first two quarters of 2006. Since then they have swung to neutral, showing zero “New Orleans Effect”.

“Current spending, while large, is a lot less than I would have thought,” said Cary Leahy, senior managing director with the New York and London consulting firm Decision Economics and a previous director and senior economist at Deutsche Bank. “If you look at the cumulative data, believe it or not, you’ve only spent a little over $50 billion. That’s a lot of money, but I would have thought by now the number would have been between $75 (billion) and $100 billion, because those were the kinds of numbers that were pledged in various appropriations bills. So there has been a lot less spent. And in particular, that $50 billion that I’m referring to, $17 billion or $18 billion of those dollars were payouts for national flood insurance. I would have thought a larger federal response would have been in the offing.”

The U.S. Treasury Department considers nearly half of the $35 billion in non-flood insurance payments already spent to be “transfers.” That is money that replaced lost production because of the storm, such as FEMA emergency assistance or using up existing inventories and therefore not considered to affect GDP or the Gross State Product of Louisiana.

Those dollar amounts were spent directly on rescue operations, cleanup costs and emergency cash transfers to individuals throughout the stricken region. Most of these dollars would not show up on national indicators, like the GDP, because they are either expenditures that either come out of inventory or are considered shuffling of funds. They were also spread out for the costs borne for hurricanes Katrina, Rita and Wilma.

That leaves a number of only $17 billion, which could have been spent to rebuild infrastructure. Start subtracting direct grants to Louisiana and Mississippi in the form of Community Development Block Grants (CDBG), which are used to fund programs such as the Road Home, and the apparent numbers for direct Federal rebuilding spending become quite small.

The economists all agree that the money actually used to rebuild properties, such as housing and levees, would directly affect GDP growth, but these numbers have simply not appeared to as great of an extent as they were expecting.

“GDP tends to increase in the rebound, because you’re adding construction activity, particularly if it goes to a government reconstruction project for dams and the like,” Leahy said. “Another $50 billion in the U.S. economy spread over three years would add a couple of extra tenths to the U.S. GDP growth, but there [in Louisiana] it would be magnified enormously.”