Katrina gives U.S. economy reason to worry

Katrina gives U.S. economy reason to worry

While recovery efforts slowly move forward in the battered Gulf Coast states, the US economy is attempting its own recovery one week after Hurricane Katrina. Just as people are starting to regain their footing in hurricane stricken areas, the various economic sectors most affected by Katrina are only beginning to understand how, when, and to what extent they will suffer. Indeed, nervous investors and analysts are beginning to question whether an economic recession may be ahead. In an already fragile steel sector, things were already expected to go from bad to worse. Compared to an incredible third quarter 2004, third quarter 2005 may well be the worst in recent memory. Burgeoning inventories and anemic new order books have prompted the industry to drastically cut production. Compared to a year ago, when 32 blast furnaces were operating nationwide, steelmakers have idled 9 in the past twelve months. Many major steelmakers, such as Nucor and US Steel have already warned investors to expect significant drops in profits, ranging 30 to 100 percent. Now they must contend with logistical nightmare as shippers scramble to find alternate ports to get their goods upstream to destinations. It is unclear exactly how long the Port of New Orleans, which is the nation’s busiest by volume, will remain closed. Published estimates put the timeframe between three to six weeks. But, new reports are arriving daily and the exact situation is conflicting. At this time, what is known is that the Port of New Orleans remains completely closed and river traffic is limited to one way, daytime traffic with a 35-foot draft. Ships are moving upriver to Baton Rouge where they are unloading. Other ships are waiting offshore while the port is cleared of sunken barges, shrimp boats, and other hazards. Many other shippers have been forced to find alternate ports like Houston, Tampa Bay, Miami, and Charleston, who will likely see surge in new traffic. Most experts agree that damage to the port itself was not as extensive as originally believed, but that most problems will be getting port personal back to work. New Orleans’s infrastructure has been severely damaged from the storm. More to the point, the city is a veritable ghost town with nearly all of its residents having evacuated to other parts of Louisiana and surrounding states. Without people to work at the port, it is unclear how it is going to resume normal business functions. Regardless, the port situation remains a headache of unparalleled proportions to both importers and exporters. If various companies throughout the region are unable to locate alternative ports through which to transport their goods, their losses could mount and possibly force many out of business. The oil situation is a little less grim. While supplies remained tight throughout the Labor Day holiday weekend, it now appears the situation is easing as other nations have released emergency reserves to help US demand. As a result, oil has retreated from its original post-Katrina high of $70. Today, oil eased just below $66. Further helping things along are announcements that several refineries will resume operations soon, if not already. At first blush it appears the economy may overcome the disruptions and regain its footing without enduring too much long-term damage. Nevertheless, it would be shortsighted to believe it will emerge unscathed. While the pinch at the pump is immediately obvious, the coming months will be the real test of the nation’s economic health and stability. For one, home heating costs are sure to rise beyond what was originally expected. They had already been forecast to increase 15 to 25 percent but last week saw another 20 percent jump in futures. Real estate costs may also take a significant hit as materials needed to rebuild the area will surely stretch supplies thin and inflate costs. The stance most analysts are taking is that is far too early to tell what direction the economy will take. Most believe that the Federal Reserve will hold off on raising rates later this month. That alone, however, may not be enough to stave off an actual full-fledged recession. In any event the plethora of extreme problems will surely not dissipate any time soon. In fact, the effects of Katrina will be felt for many years to come. In the near term, nervous economists will be casting an eye on the more obvious effects of higher energy costs, transportation disruptions, and near absence of economic activity in the area.