The Effects of Hurricane Katrina on the U.S. Economy

            On August 29, 2005, Hurricane Katrina hit the U.S. Gulf coast in 3 states, Louisiana, Mississippi, and Alabama. The human effects, loss of homes, loss of lives are blatantly obvious on the news each night even this many months later. The challenge is understanding the economic costs and working to lessen them, before it does as much damage as it easily could.

            The most shocking initial effect on everyday Americans that lived hundreds of miles away was the oil and gasoline prices skyrocketing. Major pipelines were damaged. Yet, before there was actually a supply/demand problem, there was the perception of the problem. Many gas stations raised their prices because of the expected shortage and the realization that a panic was beginning. Gas prices shot up to $5.00/ gallon and stations were running out much earlier than expected. The prices inflated due to perceived shortage of supply, and then there actually was a shortage of supply. Due to the eventual lessened supply, the equilibrium price became higher, for a period of time.

            Another problem caused by Hurricane Katrina was the shortage of products that were stored or received from the Port of New Orleans. Folgers Coffee was stored and processed in New Orleans. There are still spaces on the shelves where this product usually belongs. Other brands such as Maxwell House are not having the same difficulty in the market place due to these distribution problems because they didn’t store and process their coffee in New Orleans. Maxwell House is gaining market share, while Folgers is losing. Perhaps, due to this shortage Folgers is losing long time, formerly loyal customers because they have looked elsewhere to fill their coffee needs. A similar situation is occurring with bananas, people have had to look elsewhere for bananas, they have to be imported using another port, there is the slight shortage of the bananas that where coming in around the time of the hurricane and perhaps a slight increase in the price of bananas due to this supply/demand problem.

            Before Hurricane Katrina, New Orleans was a huge tourist attraction. Because of the hotels, restaurants, music, clubs and convention centers, many organizations held meetings and conventions there. It was also a popular vacation destination. Many major airlines flew into the Louis Armstrong airport daily. These flights stopped after the hurricane. The conventions, vacations and meetings were either canceled or held somewhere else. The airlines lost the money they had expected. Budget forecasts for the entire year where destroyed in just a day. The price of gasoline and oil also had an effect on the airlines, because ticket prices to other destinations had to be raised, making less people want to fly.

            Now FEMA and the former residents of the areas hit by Hurricane Katrina are in the rebuilding stage. Some areas are going to take years to rebuild. There are certain things that towns and cities need in order to be inhabitable, such as schools, stores, hospitals and some of the affected areas still do not have these things. The displaced residents are building lives in other cities, while people in rebuilding or construction trades are relocating to the Gulf Region while most of the professionals, who have families to support, need to work every day and have a home, had to leave, rather than wait for things to return to the way they had been. The economy in the hurricane damaged areas has been turned upside down.

            One of the solutions to these long term economic problems and fears about the inflation was the Federal Reserve raising rates. There has been some debate about what this is perceived to do and the actual effects. The Fed says the economic damage from Katrina is temporary, as are the benefits of the labor used to rebuild and is more concerned with future inflation. There is a balance that needs to be discovered, a “neutral” interest rate and that is what the Fed is working towards. Since the damage to the economy was less than I expected, I actually believe the Federal Reserve Bank was correct in proceeding with this rate hike. At a certain point, they will have to stop of course.

The effects of Hurricane Katrina will be felt for many, many years. These families who lost their homes, jobs, cars, and everything else that they owned, have to either rebuild their lives elsewhere or wait and return to their damaged homes. The businesses that were destroyed may also be destroyed financially, and may never return. It will be years before the tourist industry in New Orleans can even possibly ramp back up to what it once was. Until that time there will be a smaller supply of flights into the city, because there is less demand. There will be fewer five star restaurants, because there will be fewer tourists demanding five star restaurants. Hurricane Katrina was a one day total destruction of an entire geographic region’s economy. The Gulf Region may never be the same again.