Slowly Recovering
The economy shows resilience as jobs and energy trickle back
Pump prices reached record levels in the wake of Hurricane Katrina, but by last week it became clear that motorists would not see a 1970s replay. Except for a few initial scattered shortages and lines at service stations, fuel flowed in all parts of the country. Certainly, consumers were dismayed when gasoline settled at about $3 a gallon nationwide, up 18 percent over prestorm levels, but there were no panics, trucker strikes, or state attempts at rationing. The market worked, although painfully.
The stock and bond markets also weighed in with their verdicts: Katrina will depress the economy in the third and possibly fourth quarters, but a recession isn't in the offing yet. Indeed, the Dow Jones industrial average is up nearly 300 points from pre-Katrina levels.
"What people forget is that sometimes you need to have prices go up to bring demand down," says Michael Lynch, president of Strategic Energy and Economic Research of Cambridge, Mass. And initial government figures did, indeed, show consumer demand for fuel easing--ever so slightly--compared with the weeks before the hurricane, although it was still up 1.5 percent over the same time last year. In any case, pump prices held steady and crude oil futures fell from the previous week's highs, reflecting the market's view that imports and releases from the Strategic Petroleum Reserve would help the nation weather the shortfall as repairs to battered rigs and refineries proceed in the Gulf of Mexico.
Getting paid. Businesses from Alabama to Louisiana were starting to pick up the pieces, and their employees were slowly adapting to their new lives. For now, most large employers in the hardest-hit areas are providing paychecks, benefits, and donations to affected employees. Northrop Grumman, which employs about 20,000 in its shipbuilding facilities on the Gulf Coast, paid all employees for two weeks. Several thousand have already returned to work, with more likely to do so in the coming weeks. Harrah's, which has 8,000 employees at its casinos along the coast, will pay its workers for at least 90 days. Employees of the 17 Wal-Mart and Sam's Club stores that remain closed are invited to work at other stores around the country. Additionally, 10,000 people had applied for unemployment benefits; the Congressional Budget Office estimates that Katrina will result in a net loss of 400,000 jobs.
Some fortunate New Orleanians already have jobs in other cities with their employers, part of the mass population that will resettle elsewhere. Galen Hames was the maitre d' at the restaurant in the Marriott Renaissance Arts Hotel. Marriott bused its remaining employees and guests to Houston after the floodwaters rose and offered jobs elsewhere to those who wanted one. Hames, 34, is now a server at Marriott's Horseshoe Bay Resort in Texas. "In six days, I was fed, clothed, sheltered, cleaned, and given a job," Hames says. "Marriott didn't have to do that." He can stay in a suite rent free until mid-November, and he expects to remain there with the company.
Others were less fortunate, and no one is suggesting the effects of the worst natural disaster in U.S. history will be anything but long lasting. "I think it's somewhat perilous to predict the price [of gasoline] is going to go down substantially or not going to go up substantially, simply because we are in a very difficult situation, with no margin left, and we're only halfway through the hurricane season," says Robert Darbelnet, president of AAA, formerly the American Automobile Association. Last week, about 40 percent of the Gulf's oil and 60 percent of its natural gas production were back on line, and three of the eight shuttered refineries restarted. But four refineries will be out for months, and about 5 percent of U.S. refining capacity will be off line for the remainder of September. "The situation remains horrific, and light will be at the end of a very long tunnel," the securities firm Fimat told its clients.
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.
This story appears in the September 19, 2005 print edition of U.S. News & World Report.