Katrina's fury may strike a slight blow to the U.S construction industry

September 01, 2005 |

As cities along the ravaged Gulf Coast begin to pick up the pieces in the aftermath of Hurricane Katrina, it remains unclear as to what extent the disaster will negatively affect the economy. The impact will be much larger than any previous hurricane, but much smaller than 9/11. It will remain uncertain until it is known how quickly the shipping and petroleum industries can return to normal operation.

What is known suggests that the U.S. GDP will be as much as 0.5% lower in the second half of the year (at 3.5% plus), then similarly higher in the first half of 2006. This will be accompanied by a temporary rise of 0.5% in inflation and a temporary drop of 50,000 in monthly job gains to about 150,000. The Federal Reserve Board will keep credit costs from rising with inflation.

The impact is smaller than some media headlines suggest, given that the impacted Gulf areas account for only about 2% of the U.S. GDP. However, the impact is still quite significant, especially in the oil, natural gas, and shipping industries, each of which were operating at capacity in August and raising prices quickly. More than 20% of U.S. domestic crude oil and natural gas supply has been shut down as a result of storm damage, as have about 10% of U.S. refinery capacity and foreign crude oil import terminals and about 20% of general U.S. shipping trade (New Orleans is the largest port in the country). The status of the huge onshore and offshore pipeline network, which was substantially damaged by the Gulf hurricanes last year, is not yet known.

For the construction industry, the initial impact will be an abrupt price increase and availability problems for both plywood and oriented strand board panels. In addition, there will be a delayed impact on the supply of framing lumber.

The New Orleans construction market has been relatively sluggish, so the disaster won't have an immediate calculable effect on the industry as a whole. The impact on price and availability of building materials, other than panels, will be marginal.

However, the rebuilding that will begin later this year could amount to as much as a 2% addition to total construction spending at its peak. This poses a huge risk for price increases and availability, especially for gypsum board. This rebuilding increment will be larger than what followed the four Florida hurricanes in 2004. Numerous specialty contractors will head for the Gulf as soon as possible, which could result in tighter labor markets elsewhere, especially in Florida and Texas.

The nonresidential market rebuilding looks to be predominately renovation and repair work, rather than new construction. There's little evidence of significant total loss of nonresidential buildings in New Orleans and just a few incidences in the smaller Mississippi market.

A bigger issue is the number of people that plan to permanently abandon the affected coastal cities, especially New Orleans. Three people I know from New Orleans told me they'll never to go back. If that's the case for a great number of people, many institutional and commercial buildings may never be repaired or replaced.

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