Economic Impact of Katrina Impact

Economic Impact of Katrina

Impact of Hurricane Katrina on Job Market and Economy Both Locally and Federally

What is the overall impact of Hurricane Katrina on labor markets in affected areas and how that affected both local and the national economy?

When Hurricane Katrina slammed into the Gulf coast, it left behind many lasting affects. Aside from the horrendous loss of life, the Hurricane left behind devastation and destruction of unprecedented amounts. There are two primary arguments concerning the impact of Katrina on employment and the Labor Market in the south and in the nation. The first scenario only considers the loss of business in the area. The other considers the need to rebuild, creating a surge in the construction industry. This research will explore both sides of the labor market issue in the wake of Katrina.

The Bureau of Labor Statistics has attempted to measure the affects on local labor markets in the aftermath of Katrina (Clayton & Spletzer, 2006). Wage records from Louisiana and Texas, as well as data from the Quarterly Census of Employment and Wages (QCEW) were used as primary sources of measurement. Documents from the U.S. Department of Labor are considered to be primary sources in this research study. They contain information that the civilian researcher does not have access to and are considered the most credible sources available. Therefore, resources from sources such as these will be the primary data source for this study.

Business is a dynamic force, with layers of relationships that take many years to establish (Clayton & Spletzer, 2006). Katrina represents a force of rapid change in New Orleans and in the surrounding area. Katrina wiped businesses out in an instant, yet at the same time opened the door for new ones to take their place. The socio-economic status of the New Orleans area made it unique. The people of the area are close knit and their business relationships often extend into other areas of their life. After Katrina, the fabric has changed. New Orleans will rebuild and recover from the disaster, but the fabric has changed and the new economy will be built on a new set of relationships. The old fabric of the city has been changed forever.

The first major change in the labor market and business landscape of New Orleans was a drastic population drop. The population of Orleans Parish dropped from 437,186 in July of 2005 to 158,305 as of January 1, 2006 (U.S. Census Bureau, 2006). These population drops were the result of several forces. First, there were those that were killed or severely injured by the Hurricane. The evacuation took many rapidly from the area. However, the evacuation was temporary. Many returned to the areas to rebuild, but many did not and remained in other areas of the country. As old jobs were wiped from the face of the earth, people continued to leave the New Orleans area for more hospitable conditions. With 7,361 persons still living in FEMA trailers as of April 2008, the living conditions and opportunities in the New Orleans area do not look appealing to many (FEMA, 2008).

The affects of natural disaster are typically short-lived events. Buildings are destroyed and the floodwaters quickly rise and recede. Business and life returns to normal in most cases. However, this was not true with Katrina. The damage was so widespread and the floodwaters remained high for quite some time after the storm was over. Recovery from Katrina was slower than from many similar natural disasters. Katrina was set apart from other similar disasters were the scope of the destruction and the slowness of the recovery. This was the key overall factor that resulted in the greatest amount to long-term impact on the economy and labor force.

Labor Force in Transition

According to required federal labor wage records, the number of jobs in Louisiana and Texas were on the rise for the first three quarters of 2005 (Clayton & Spletzer, 2006). However, the number of jobs dropped in the fourth quarter of 2005 (Clayton & Spletzer, 2006). The greatest impact was seen in New Orleans. As of the third quarter, 2005, New Orleans reported 425,474 persons employed in the area. In the fourth quarter, this number was reduced to 351,212 (Clayton & Spletzer, 2006). However, remarkably the number of unemployment claims dropped by almost 500 new claims in the same period (Clayton & Spletzer, 2006). Typically, when one sees a localized drastic reduction in the workforce, they will also see an increase in unemployment claims. This was not the case in New Orleans.

Statistics in Louisiana and Texas followed a similar pattern. In Louisiana, there were 1,965,717 wage earners in the state. In the fourth quarter of 2005, this number dropped to 1,936,403 (Clayton & Spletzer, 2006). This is only a reduction of approximately 1%. New unemployment claims dropped from 82,441 to 79,774, still not a significant drop, but it still raises an important question, where did those workers go?

Only Texas did not follow the pattern demonstrated in New Orleans and in Louisiana. In the third quarter of 2005, Texas had 11,133,717 wage earners. In the fourth quarter, this number dropped to 10,948,552. This is not a significant loss in jobs, but it still demonstrates that Katrina had an impact on the entire region, even if the affect was small. Only in Texas did unemployment claims jump in the fourth quarter. Unemployment claims rose statewide from 382,819 to 388,519 (Clayton & Spletzer, 2006). Only 185,165 jobs were lost, with only 5,700 new claims filed for unemployment.

The impact of Katrina on the labor force was felt the greatest in New Orleans and the area immediately surrounding the flooded city. This impact is reduced when one spreads the effect out over the entire state of Louisiana. It still had a traumatic impact on the state of Louisiana, which may be because New Orleans was a major economic center and business district for the state of Louisiana. When one spreads the effect out over the region, the impact is even less. On a national level, the labor impact of Katrina is barely noticeable.

Although the numbers of workers displaced sounds significant, particularly when one considers the area directly surrounding New Orleans. However, the impact of Katrina on the labor force is diluted as one considered larger and larger geographic areas. The pattern discovered in the labor force looks much like the destruction of the hurricane itself. In the area that was in the direct path of Katrina, the hurricane had the greatest impact on the labor force. However, as one moved farther from the site of landfall, the impact of the destruction becomes less noticeable, until is it hardly noticed at all on a national level.

This still leaves the question of what happened to the workers that lost their jobs in the wake of Katrina. They do not appear to have filed unemployment in the local area. There are several explanations that may help to answer this question. The first explanation is that the workers simply left to seek employment in other parts of the country. They were absorbed into the economies. Once again, there would be some type of dilution effect as one worker went here and one worker went there. The effect on the local economies would not be that significant and would be difficult to reliably track, if that were the case.

However, another explanation can be found by comparing labor records from 2005 with those of previous years. When one compares the records of Texas, a similar pattern can be found, with a rising labor force for the first three quarters and then a dramatic drop in the fourth quarter. The explanation for this is seasonal worker (Clayton & Spletzer, 2006). Texas has many people that come into the area to work the fields and leave after the harvest is in. The labor pattern seen in Texas is no different from in any other year. This is a regional factor that is unique to the region and that many analysts tend to forget.

Now one must ask how this same trend translates into Louisiana and New Orleans. Another interesting pattern can be seen in the historical labor results of Louisiana and New Orleans. New Orleans typically has a higher labor force in the first, second, and third quarters with a drop in the fourth quarter. Seasonal farm labor could play a factor in this yearly decrease in labor as well. However, in New Orleans, the highest employment occurs in the first quarter. Mardi Gras is a regular first quarter boost to the economy of New Orleans.

Many seasonal employees come to the area at this time of year. Mardi Gras kicks off a tourist season that continues through summer. Further support for this supposition is that historically, unemployment figures have tracked along with labor data. As labor and wages increase during the first quarter, unemployment is at its lowest. However, as the number of workers drops in the fourth quarter, unemployment rises. This is a pattern that is relatively consistent over a long time period (Clayton & Spletzer, 2006). The only difference in 2005 was that unemployment claims did not rise in the fourth quarter with the drop in jobs, as they had done in the past.

It is difficult to draw definitive conclusions as to where these employees went in the fourth quarter of 2005. To do so would be filled with generalizations that do not account for all of the factors involved. However, it can be surmised that in the fourth quarter of 2005, workers in New Orleans went elsewhere and were dispersed into other economies. Statewide numbers do not support a change that is significantly different from other years. Therefore, it does nor= appear that this diaspora had an impact on a state or national level. The only reasonable explanation is that unlike other years, where workers filed unemployment and stuck around the are waiting for first quarter employment to pick up the pace, after Katrina these workers left for higher ground.

On a local level, Hurricane Katrina has a measurable impact on New Orleans and the area surrounding New Orleans. The state of Louisiana had to absorb some of the impact of displaced workers, but the affect becomes diluted in the larger economy of the state. The impact is even more diluted on a regional level. It is hardly noticeable on a national level. There are unique yearly cycles in the local economy that account for some of the changes. However, unemployment figures indicate that Katrina did have the effect of dispersing the New Orleans workforce to other areas of the country.

This analysis takes into account several factors that are ignored by other researchers. Before jumping to conclusions about the impact of an event on the economy, one must examine the normal cycles that exist within the area. These must be ruled out as an explanation for the events under investigation before the affects of an unusual event can be blamed for the pattern. One anomaly appears in the labor records of New Orleans that indicates that Katrina had a significant impact on the local economy of New Orleans. No one will ever know where all of the workers went in the fourth quarter of 2005, but it is highly suggested that they followed a different pattern than in years past. Katrina appears to have a connection to the disappearing labor force of New Orleans in 2005.

Chapter 4:

The second sub-question is what has been the economies (local/national) overall ability to bounce back after Hurricane Katrina?

In the previous chapter, the impact of Katrina on the labor force was examined on three different levels. The greatest impact was felt on a local level in the area surrounding New Orleans. As we moved farther from the path of destruction, the affect was diluted and absorbed on each successively higher level. On a national level, Katrina itself has little direct economic impact. However, the affects of Katrina are unique in the fact that although the direct impact was relatively small, when one considers the indirect affects of Katrina, the nation felt the destruction in a very real manner.

The aftermath of Katrina had economists running algorithms to predict the national and regional impact as fast as their fingers could press the buttons. Predictions ranged from barely noticeable to disastrous (Englund, 2005). Analyst opinions varied widely, based on the factors that they chose to use for their algorithms and their knowledge of the region and its unique economic cycles.

Aside from the economic impact that is a direct loss related to the storm damage, Katrina's destruction had an impact on a wider area due to three important factors. First, Katrina disrupted oil production in the Gulf of Mexico (Englund, 2005). As oil rigs were battened down and abandoned for land, millions of gallons were not being pumped. Some rigs were destroyed or significantly damaged by the storm. Some will never be recovered, others will need costly repairs and much more downtime in order to be returned to pre-Katrina productivity.

The second major impact is that Katrina destroyed a major urban center, New Orleans (Englund, 2005). Businesses could not immediately begin clean up and go on with business as usual after Katrina. They had to wait until the flood waters receded and then some had to rebuild their businesses literally from the ground up. They took a major financial loss as their customer base had been evacuated elsewhere and tourists were reluctant to come to the area.

The third major impact that Katrina has was to disrupt transportation on the Mississippi River (Englund, 2005). The Mississippi is a major artery to the Midwest and to other parts of the country. Disruptions on the Mississippi River have an impact nationwide on transportation, the items had to be moved using more expensive land and air routes, affecting prices across the nation.

Katrina was unlike other disasters, not only by the magnitude, but also in the area that it struck. New Orleans is a major transportation artery, coupled with losses in oil production and other commodities, losses that affect New Orleans have a dramatic impact on the rest of the country. Katrina struck a critical region. It was like cutting off a major artery to the heart. This artery has a dramatic effect on the local area, but the impact spreads to other regions, in more indirect ways. This was the affect that Katrina had on the rest of the country.

How big is the economic Impact?

The affects of Katrina are directly related to the contribution of New Orleans to the national economy. In order fully to assess the impact of Katrina on a national and international level, one must examine the commodities that New Orleans supplies. Approximately 7% of U.S. exports are produced in the Gulf region (Nutting, 2005). Exports from the region include grain, poultry, paper, rice, and chemicals (Nutting, 2005). Major imports come in through the Mississippi ports including petroleum, steel, rubber, plywood and coffee (Nutting, 2005). Only until these vital imports were interrupted did the real impact of Katrina hit the nation.

Katrina disrupted approximately 22% of the Gulf oil supply and nearly 55% of Gulf natural gas production (Nutting, 2005). The length of the disruption was relatively short, only from 10-30 days, but the amount of production lost during that time was estimated to be nearly billions of dollars in lost crude. This short disruption in supply had a trickle down effect on the rest of the economy.

As oil and gas companies struggled to get production up to speed, gas prices rose. As Americans struggled to make up for higher fuel costs, they cut expenditures in other places. Is estimated that high energy prices would drive consumption lower. It was estimated that if gas prices hit $3.00 per gallon, it would result in an estimated 0.3-0.5% point drop in U.S. gross domestic production (Nutting, 2005).

The affects of high gas prices as a result of Katrina were expected to be short-lived. It was expected that gas prices would go down. However, yesterday's gas prices were approximately $4.00 at the pump and they are not expected to go down any time soon. The question that this raises is whether Katrina was really to blame for the long-term spike in gas prices, or whether the Hurricane made an easy scapegoat.

The effects of Hurricane Katrina were in the news for approximately a year, touted as the cause of U.S. economic woes. However, as we discussed in the previous chapter, even though the Gulf region is an important economic center and accounts for approximately 7% of the national economy, there is still another 93% to absorb the shock. Katrina's affect was greater on a local level. On a national level, it had an impact that was felt at the gas tank, and it had a trickle down affect on other commodities, but it was not enough to bring the U.S. To a standstill. It only caused a few minor inconveniences on a national level. The nation has recovered from the impact of Hurricane Katrina.

In 2005, one could find numerous reports of the lasting effects of Katrina (Plummer, 2005; Geller, 2005; Trumbull, 2005). Reports provided bleak reports and created widespread spread in anticipation of the storm. These same articles were still around in 2006, with their gloomy outlook on the economy, as a result of Katrina (Herman, 2006). These articles focused on the local affects on the economy. The news was not longer presenting it as a national crisis. One year after Katrina, the most noticeable affects on the economy were in oil and gas prices (Herman, 2006). However, when one tries to find these same types of articles in 2008, they are virtually nonexistent. The focus has now moved on to other more pressing issues affecting the economy.

One of the key areas affected by Katrina was in the area of professional sports. Both of New Orlean's professional sports teams left the city after Katrina. The Nation Football League New Orleans Saints and the National Basketball Association Hornets left, taking their revenues with them (Matheson & Baade, 2006). This loss constitutes major losses for New Orleans. This brought up several interesting questions about the economic redevelopment process. New Orleans has lost the economic base of its middle class. The entertainment sector cannot be rebuilt until the economic base of the middle class has been rebuilt (Matheson & Baade, 2006). Losses such as these have had the greatest impact on the inability of the New Orleans economy to make a full recovery.

The fishing industry saw one of the biggest losses in the New Orleans area. The fishing industry in New Orleans employed nearly 291,830 people annually (Colgan, & Adkins, 2006). Recovery in this area of the economy may be slower than in other sectors. This is largely because damage to the ocean environment will take years to recover. The coastal zone represents nearly 80% of the employment opportunities in Louisiana (Colgan, & Adkins, 2006). Damage to the fishing industry represents major losses for the Louisiana economy and the longest sustained negative economic blow to the area. There is not much that can be done to help the oceans recover, and the coastal regions can do nothing but wait and let nature take its course in recovery.

New Orleans has come a long way in the recovery process, but there are some areas of the economy that will remain changed forever. For instance, the loss of national sports teams is income that cannot be regained, at least anytime in the near future. New Orleans would have to attract another major sports team in order to recover that income. However, in the areas of New Orleans income that have the greatest impact on the national economy, they have recovered nicely. (Arnall, 2007).

On a national level, the economy recovered quickly. The oil and gas production was up to pre-Katrina levels in months. On a regional level, indicators were that sale tax revenue, total employers, job and the size of the labor force were restored to at least 79% of pre-Katrina levels within a short period of time (Lu, 2007). The U.S. Postal service has restored delivery to nearly 2/3 of the households in the New Orleans area (USPS, 2007).

With many homes destroyed, there was a rush to find a place to live. Real estate soared in the second year of recovery. Single family homes have been the biggest seller. Sales have now established to their pre-Katrina levels (Greater New Orleans Community Data Center, 2007). Sales tax levels from Mardi Gras have been restored to pre-Katrina levels. City revenues are nearly normal as well (Guillet, 2007). By the fall of 2006, New Orleans has reached 85% of its employer vase, with actual employment levels at 83% of pre-Katrina employment levels (Dolfman, 2007).

The affects of Katrina were barely felt on a national level. However, the story is not the same in the vicinity around New Orleans. Katrina caused permanent damage to several major industries. The fishing industries and the loss of national sports teams represents the greatest amount of permanent damage to the New Orleans economy. However, as a whole the economy has recovered nicely, with most sectors at near pre-Katrina levels.

Doomsday predictions made just days before the hurricane bared down the Louisiana coast prepared U.S. citizens for the worst. The worst did come and the worst did happen. For some time New Orleans was crippled, while the rest of the country watched. On a national level, the affects of Hurricane Katrina were minimal and short-lived. New Orleans took nearly two years to recover to what could be called a full recovery, but they did recover. There are many industries that will be hurt for many years to come, but on the whole, New Orleans could be said to have fully recovered.

Although, the recover of New Orleans and the impact of Katrina on the entire country are almost gone, there are still some lingering questions that must be answered before we close this chapter in American history. For instance, did Katrina light the fire that led to continually rising gas prices, or was that a separate matter altogether. This and other questions will be answered in the following chapter.

Chapter 5:

What other keys issues other than Hurricane Katrina have affected the economy since 2005?

As we discovered, the impact of Katrina was felt on a local level in New Orleans for a longer period of time than in the rest of the country. The U.S. economy did feel some indirect affects from Katrina, but these were generally short-lived. Katrina was blamed for many affects that in the final analysis turned out to be exaggerations and hype. When one examines the real numbers, they sound enormous, but when one compares them on a state, regional and national level, the economic damage of Katrina is only a small percentage of the total picture.

The economic and labor impact of Katrina must be viewed from a macro and micro level in order to understand the full impact of the storm. The affects of natural disasters are usually short-lived. The same can be said for Katrina. The recovery from Katrina was slower than from most hurricanes, but the nation did recover, and New Orleans did recover. Some sectors of the economy are still recovering, but they are recovering and eventually, they too will be back up to their former glory.

For a while, Katrina was blamed for rising oil prices and the effects on the economy. However, this excuse is no longer valid. Oil production in the Gulf region has been restored to pre-Katrina levels for nearly two years (Healey, 2005). Employment in the oil and gas industry returned to near normal levels almost as soon as the storm danger had passed (BLS, 2006). Now the economists seldom mention Katrina in connection with higher gas prices. They have found other scapegoats in connection with rising oil prices. At the time Katrina hit, there oil prices were already on the rise (Oil-price.net, 2008).

One of the key difficulties in analyzing the affects of Katrina on the economy, especially oil prices, is separating the effects of Katrina from other factors that were already causing these affects in the economy. When one considers the trends in oil prices that were already on the rise before Katrina hit, it is difficult to determine if Katrina had any real impact at all. If Katrina did have an actual effect on gasoline prices at the pump, the amount of blame that can be attributed to the hurricane is debatable. This is especially true considering that much of the economy of New Orleans is now functioning at pre-Katrina levels.

The U.S. has been in a period of general economic decline for quite some time. Pundits will argue as to exactly how long, but none of them are actually denying the decline right now. Some say that it is here; some say that it is yet to come (Wallack, 2008), but few currently deny its existence. Overall economic downturn, loss of jobs, and all of the affects that go with it are a reality now.

Katrina cannot be blamed for the current economic downturn that exists today. The formal definition of a recession requires when the natural GDP growth falls below 2% for quarters in a row. However, most recessions continue for a much longer time. Economists are reluctant to call a downturn that makes a quick recovery a recession, it generally must be much longer in duration than that. There are those that claim Katrina started the recession, or that it was the final straw that plunged the nation into a downward spiral. However, if one examines the evidence presented in the previous two chapters, there simply is not enough evidence to support this supposition. The economies have recovered to pre-Katrina or nearly pre-Katrina levels, which undermines the claim that Katrina continues to be the culprit in U.S. economic woes.

Other factors that affect the impact of Katrina on the U.S. economy are the many other variables that currently exist, and that are affecting the economy on a much larger scale than Katrina ever did. One of the most prevalent factors is the declining dollar, especially against the euro and other currencies around the world (Ellis, 2008). As the dollar declines, it tends to drive up other commodity products that are priced in dollars. Theoretically, it is supposed to lower the costs of commodities that are priced in other currencies and sold as imports. Prices of U.S. goods have been on the rise for some time, and Katrina had little to do with it. However, rising costs of consumer goods are not the key concern of economists. They fear that a weakening dollar will make consumer prices rise is not the major concern of policy makers. They feat that a weakening dollar will make the U.S. unattractive to foreign investors (Ellis, 2008).

Another problem that plagues the U.S. economy is the current credit crisis. The housing crisis is closely tied to the credit crisis. Both are the result of credit issuers attracting consumers that could not afford to take out a loan with low rates and attractive incentives. The consumers took out loans that they could not realistically afford and now they cannot pay them back (Leonhardt, 2008). This is the basis of the crisis. It is simply the result of poor financial management from major banking institutions, nothing more.

There are many other factors that are affecting the U.S. economy to various degrees. Gas prices have sales of larger, low mileage automobiles down, but it also means a rise in sales in high-mileage varieties. American is tightening their wallet. Gas prices are a major reason for declines in consumer spending. Uncertainty is the greatest factor in rises and falls in spending. Rising prices can have less of an impact than uncertainty. Consumers are generally aversive to uncertainty, and attracted to stability.

Katrina's greatest affect on the economy was in the creation of uncertainty. When the numbers were in, the initial damage was great. However, gas prices began to rise even before the hurricane hit. Prices were on the rise with the prediction that the oil fields would be hit. They were hit and production did decrease, but it soon recovered. The fears over Katrina and the economic affects were worse than the actual affects on the economy, especially when one considers the affects on the national economy.

Uncertainty, especially before Katrina made landfall, represent the greatest affect that Katrina had on the economy. The real impact on the economy was devastating, particularly in the New Orleans area, but they did recover. This recovery demonstrated the resiliency of the economy. Many businesses recovered, but many did not. Katrina represents a lesson in business and economic planning. Katrina taught us that at any time, an event could happen that places the financial future of the local economy and of the nation at risk. Sometimes, we are not in control of these events. Events such as these threaten our sense of security. Even before the hurricane made landfall, there were concerns being voiced over businesses and jobs that would be lost.

The most difficult aspect of an event such as Katrina is the uncertainty. People knew that lives and the face of the region would be changed forever. After Katrina, many left the area, never to return. However, on a macro level, these people were absorbed into the landscape of other areas of the nation. They are still a part of the national economy, only they are no longer a part of the economy of the region. Katrina shifted the face of the economy in many ways. Katrina taught us to be flexible and to remain aware of the dangers that lurk. From an economic standpoint, the impact of Katrina is different depending on the level that one chooses to examine. As we discovered in this chapter, there are many factors that are currently having an impact on the U.S. economy, none of which can be directly attributed Katrina, except for oil prices. Other than that, Katrina's affects have faded from the minds of many Americans, as they focus their attention on other issues.

Chapter 6:

From a business and economic standpoint what are some valuable lessons that have been learned through Hurricane Katrina, and how will that better prepare our local and national economies for the future.

Katrina taught us some valuable lessons about the economy and about business planning in general. Katrina represents a sudden, unexpected event. There was little way to plan for the destruction and affects on the economy, once the hurricane was announced and preparations were being made for landfall. At that point, it was anybody's guess and the best that businesses could do was to try to protect their assets as best as they could and get their people out of harms way. In the days before Katrina, the best that businesses could do was to hope for the best.