by David Iaia
Hurricane Katrina came ashore in southeastern Louisiana early Monday morning, threatening areas—particularly low-lying ones—along the Gulf Coast with massive damage. Although Katrina was downgraded to a category 4 overnight, it still is likely to be among the most powerful storms to ever hit the United States. While the personal toll will surely be enormous the net effect on the economy is far from clear at this time. Already hundreds of thousands of residents have been forced out of their homes, and many will return to heavily damaged neighborhoods.
In terms of hurricane size, the closest comparison appears (as of Monday morning) to be Florida’s Hurricane Andrew of 1992, which totaled more than $30 billion in damage and is the costliest storm in US history. But there are several key differences between Andrew and South Florida, and Katrina and New Orleans:
- New Orleans is a significantly smaller economy that avoided a direct hit. South Florida suffered a near-direct punch and is a much larger, more densely packed economy than New Orleans. The real gross metro product (in 2000 dollars) of Miami and Fort Lauderdale in 1992 was roughly $85 billion; the New Orleans metro—with the same land area—is only half that today. Adding in Gulfport-Biloxi and Hattiesburg puts the larger region’s output at about $54 billion, but over a much greater geographic area. Furthermore, Katrina veered east in the morning, sparing the city the worst.
- The New Orleans economy is less resilient. The Florida economy is vibrant with lots of in-migration, heavy demand for services, and a busy real estate market. Thus, all the pieces were in place for the economy to ramp up and rebuild. The New Orleans and Gulf metros are more mature and less dynamic economies, meaning the recovery could take longer. Additionally, New Orleans has more industrial activity—especially in oil refining and chemicals production—that could take a long time to get back on line, further slowing the area’s return to normalcy.
- New Orleans’ geography is unique. With much of the city below sea level, catastrophic flooding is possible. If the levees are overrun, getting the water out would be a difficult, prolonged task, as well as a potential environmental disaster. We have not seen that in previous hurricanes, and even local officials are uncertain just how severe the effects could be.
Lastly, a cautionary note about storm impacts: as was shown with last year’s Florida hurricanes (for example), great personal loss and media hype do not necessarily mean a large negative effect on the area’s economy. Most estimates of the effects of last year’s storms, even ones made weeks later, were vastly overstated. Even local economies are large and diverse and able to sustain hits without collapsing. That said, one big wildcard here is the ramifications for the large local oil-refining industry: an extended closure could send oil and gas prices even higher, severely hurting the national economy. With the storm not yet passed, it will take days or weeks to fully assess the damage and its impact.
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