COMMERCE BANK ECONOMIC REVIEW - September 2005

After Katrina, What?

By Joel L. Naroff, Ph.D.

Katrina likely will turn out to be the most devastating natural disaster this country has ever experienced. The human cost is simply incalculable and there really is little that can be done to make the residents of New Orleans and the Gulf Coast of Mississippi and Alabama whole. The question is: “What will happen to the economy as a consequence of the hurricane?”

First, it is important to know where we were before the storm hit. The economy was growing solidly, but we were beginning to see signs of inflation picking up. Energy costs were already high before Katrina and firms were looking for ways to pass on those costs. In addition, labor costs were beginning to accelerate. So, we had a good economy, but the threat of higher inflation.

Katrina’s economic impacts are enormous and unprecedented. We have never seen a major American city destroyed, so it is difficult to really know what the ultimate effects will be. But it is worth providing some initial estimates. 

The lost of jobs could easily be as high as 400,000. Many of the lost positions will never come back. Large number of small businesses will be unable to re-open and the hospitality sector throughout the coast – not just in New Orleans – could be gone for years. If the Superdome and the New Orleans Convention have to be torn down and the casinos along the coast cannot be rebuilt, few jobs will return. And that would force many of the companies that service the hospitality sector to close.

The potential for long-term job losses because of the toxic flood, and the likelihood that insurance will be hard to get and costly, is what makes the recovery so uncertain. In New Orleans, it is not yet clear what buildings can even be saved and the demolition could take years. In Mississippi and Alabama, many Riverboat gambling sites may no longer be financially feasible. If that is the case, then much of the rebuilding that is being promised will not occur. The problems and market forces likely will tell us that, unfortunately, what had existed cannot be recreated.

Normally, it is the rebuilding that creates the round of economic expansion that follows the storm damage-induced slowdown. But with so much uncertainty about what can or will – or even should be – rebuilt, how much of an economic upturn will result is not obvious. The only thing we can be fairly certain of is that the humanitarian and income aid will allow the evacuees to keep spending, at least for a while.

In a nutshell, when we evaluate the economic impacts of Hurricane Katrina, the losses are clear and huge. The traditional offsets, though, while also large, may not go to creating many long-term jobs or rebuilding the cities and towns devastated by the storm. If that is the case, and I suspect it is, then there will be lasting economic effects that go along with the emotional impacts that those who lost so much will be living with for a long time. 

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient BankÒ, is a leading financial services retailer with more than 330 convenient stores in New Jersey, New York, Pennsylvania, Delaware and new markets Connecticut, Washington, DC and Virginia. The Bank will expand into southeast Florida in early 2006. Headquartered in Cherry Hill, N.J., Commerce Bancorp (NYSE: CBH) has $33.4 billion in assets and, in second quarter 2005, achieved a deposit increase of 28% and earnings per share growth of 15%. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.