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Paul E. Polzin Bureau of Business and Economic Research The University of Montana - Missoula

Hurricane Katrina and the Montana Economy. Paul E. Polzin Bureau of Business and Economic Research The University of Montana - Missoula. Katrina Economic Impacts. Direct Impacts Lake Charles, LA to Mobile, AL is a sizable economic region with about 2.5 million people.

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Paul E. Polzin Bureau of Business and Economic Research The University of Montana - Missoula

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  1. Hurricane Katrina and the Montana Economy Paul E. Polzin Bureau of Business and Economic Research The University of Montana - Missoula

  2. Katrina Economic Impacts • Direct Impacts • Lake Charles, LA to Mobile, AL is a sizable economic region with about 2.5 million people. • Storm destruction is a one-time loss of GDP. Total losses likely to exceed $100 B. • Katrina will have negative impacts on US economy in 2005QIII and QIV. • Reconstruction will buoy US economy in 2006QI, 2006QII and thereafter.

  3. Katrina Economic Impacts • Transportation Impacts • Port of New Orleans is 2d largest in U.S. Serious damage to facilities • Major exports from New Orleans are wheat corn, soybeans. • Major imports are steel, coffee, bananas, natural rubber and plywood. • Alternative ports in southern US are already near capacity, but some destination shifting and alternative transportation is likely.

  4. Katrina Economic Impacts • Energy Impacts • Gulf Coast is major source of US crude and the site of major petroleum refineries. • The risks to refined products now appear more serious that to the supply of crude. That is, damage to refineries may be greater than to offshore rigs. • Further spike in retail gasoline prices possible, perhaps $3.00/gal or more. This is supply shock on top of demand shock in 2004-05 caused by strong worldwide economic conditions. • Return to current levels in first half of 2006 as the supply shock recedes.

  5. Katrina Economic Impacts • US Economic Policy • US Economy was in different phase of the business cycle after 9/11. Then we were in a recession phase, with the Federal Reserve attempting to lower interest rate. • We are now in a recovery phase with the Federal Reserve trying to (slowly) raise interest rates. Increased uncertainty about Katrina damage will make the Federal Reserve’s task more complicated. • Consensus is that there will be only one more 25 basic point increase in Federal Funds rate during 2005, perhaps in September. • Greenspan may take a “wait and see” attitude about the impacts of Katrina on US economy.

  6. Katrina Economic Impacts • Overall risks to US Economy • Katrina introduces mostly downside risks – greater probability that growth will be less than expected. • Energy markets are tight and the full extent of damages not yet known. Any other worldwide supply disruption could send prices even higher. • Consumers and businesses could react negatively to price increases and cut spending – leading to unexpected aggregate demand decrease.

  7. Katrina Impacts on Montana

  8. Montana’s Economic Base • Nonresident Travel • Wood Products • Agriculture • Mining • Federal Gov’t (Incl. Military) 71%

  9. Katrina Impacts on Montana • Agriculture • Montana primarily produces cattle (domestic) and wheat (export). Almost all Montana wheat exported through Ports of Portland and Clarkston (WA). • Higher energy costs could affect farms production costs, but most of the impacts will be in 2006. • Montanans do consume bananas and drink coffee.

  10. Katrina Impacts on Montana • Mining • There is already oil boom in eastern Montana, which is supply constrained. Oil prices are now greater than local extraction costs (approx. $27/brl). Further oil price peaks unlikely to unblock supply constraints. • Any short-run peak in commodity prices (zinc, etc) unlikely to significantly increase Montana production.

  11. Katrina Impacts on Montana • Wood products and manufacturing • Higher energy prices will increase costs. ASMI in Butte. • Slower than expected interest rate hikes may keep construction booming longer. • Reconstruction activities may buoy lumber and plywood prices. • Gulf Coast is major wood and paper producing region. Net impact on these producers not yet known.

  12. Katrina Impacts on Montana • Nonresident Travel • Montana’s peak travel season already passed. (just like 9/11) • Higher energy prices will have uncertain impact. They will negatively impact those coming from far away, but encourage regional tourist to stay nearby.

  13. Katrina Impacts on Montana • Summary • No reason (yet) to change revised forecast. Montana Nonfarm Labor Income (Percent Change) Percent Actual Projected 4.1 3.4 3.8 3.2 3.2 2.9 2.8 2.8 2.6 2.6

  14. Katrina Impacts on Montana • Risks to Montana’s Economy • Diversion of federal funds to Gulf Coast • Overall national slowdown due to potential consumer and business spending cutbacks.

  15. Questions? Thank you. Bureau of Business and Economic Research The University of Montana - Missoula

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