Slowly Recovering
The economy shows resilience as jobs and energy trickle back
The Energy Information Administration predicted that pump prices would eventually fall back to about $2.58 per gallon by the end of the year. By then, however, consumers will be seeing dramatic increases in home-heating costs--up 71 percent for natural gas, 31 percent for heating oil, 40 percent for propane, and 17 percent for electricity, EIA says.
Politics. Still, Katrina was a stern test of the nation's deregulated energy markets. The federal government long ago abandoned the price control and allocation system that worsened consumers' woes in the 1970s. Of course, last week politicians were clamoring for government action to quell gas prices, with some proposals--a price freeze and a windfall-profits tax on the oil industry--reminiscent of Nixon- and Carter-era policies. But neither would address the fundamental imbalance of strong global demand matched with stagnant supply and a refining and delivery system that has not been expanded for 30 years. The marketplace now operates better than it did during previous oil shocks, but that is no reason to be sanguine. "This time the market mechanisms are working," says Jamal Qureshi, oil market analyst for PFC Energy, "but what they're saying is that we've got a crisis."
Whether that crisis will extend to the broader economy is still too early to discern. "The U.S. economy has taken a bunch of hits over time, and history has shown it to be pretty resilient," says Bob Doll, president of Merrill Lynch Investment Managers. He predicts the lost output from the storm will be recouped later this year or early next. Once the rebuilding begins on the Gulf Coast, every building that is repaired and every home that is replaced and refurnished will add to economic activity. Indeed, the government estimates that each housing start will increase gross domestic product by about $200,000.
Part of the difficulty in gauging the economic impact is that work crews have yet to survey the damage, because water is still being pumped out of New Orleans. But experts last week were throwing around numbers like $100 billion to $150 billion. Who will pay that is also unclear. Because so much of the damage in New Orleans, for example, is flood related, those costs are not likely to be borne by private insurers. Private home insurance contracts typically do not cover flood damage, though they would cover losses caused by high winds. Flood insurance, instead, is underwritten by the federal government. That means the cost ultimately could be borne by taxpayers, in the form of a higher deficit, which will undo the progress made so far this year from greater-than-expected tax receipts.
Unemployment is at a four-year low, with jobs being created last month at the fastest monthly rate since 1999, and the service sector grew significantly faster in August than expected. "If you have more than 80 percent of the economy operating on all cylinders, then this means pre-Katrina, this economy was rocking," says Anthony Chan, senior economist with JPM organ Asset Management.
Indeed, the resilience of the U.S. economy can be seen in how quickly even residents of such a battered region can bounce back. Sabrina Williams, an assistant executive housekeeper at the Doubletree Hotel in downtown New Orleans, left the city with just a few changes of work clothes. Williams, 39, met up with her parents and her 91-year-old aunt, who got out before Katrina made landfall, and the family has settled in a cousin's home in Madison, Ala. Williams has already applied for unemployment and attended a job fair in nearby Huntsville. Local hotels are letting her use their printers and computers to organize resumes, neighbors share job opportunities they hear about, and a kind woman donated some appropriate work attire. "I'm good to go with everything now, except a job and shoes," says Williams, who wears a hard-to-fit size 10 1/2, in case anyone's got some extras.
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