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Hurricane Gustav struck the New Orleans area on Monday morning. The hurricane was far less destructive than Katrina was in 2005, but poses a greater threat to our weak economy.
Economists agree that a major natural disaster may help lift economic activity because of insurance payments and federal aid, however, in the short term, the destruction can be a major hit to the economy.
The company EQECAT, which estimates losses for insurance companies, says Hurricane Gustav will cause between $6 billion and $10 billion in insured losses. This amount is only a fraction of what was caused by Katrina: a whopping $41 billion in insured losses. Even so, Gustav will make the record books as one of the top 10 most expensive storms in U.S. history.
The impact which Gustav has on the economy is important. Going into the storm, the U.S. economy suffers from a housing downturn, credit crisis, and skyrocketing unemployment rates.
"Even if it causes $10 billion in damage, that is not a huge deal for the overall economy. But it's coming on top of everything else going wrong. It makes it more likely the recession scenario for the end of the year." said David Wyss, chief economist at Standard & Poor’s.
During Hurricane Katrina, the economy was at its peak, "That showed how incredibly resilient and flexible the economy was in 2005," said Rich Yamarone, Director of Economic Research at Argus Research.
Analysts are concerned that this storm could lead the country to the inevitable recession, "It's another blow to an economy that can't afford to take these punches. It could push us a lot closer to a recession," said Yamarone.
One of the major side effects of Gustav is the impact it will have on energy prices. Futures prices for gasoline, crude oil, and natural gas fell Monday as analysts predict the damage will not be so bad. Some experts say it is too soon to predict there will not be a rise.
"We probably won't know until Thursday the full assessment of what the damage will be," said Kenneth Medlock, energy fellow at Rice University.
Medlock is more concerned regarding natural gas prices; roughly 10 percent of the natural gas Americans consume is produced off of the U.S. Gulf coast, whereas only 5 percent of the crude oil Americans consume is produced in the region.
"It crossed right through that (natural gas) territory. If there was any damage to that particular infrastructure, it could affect natural gas production for some time," Medlock said.
Natural gas is the primary fuel used for winter heating and accounts for 20 percent of the nation’s electricity generation.
Some economists say that if there is not a spike in energy costs, the U.S. economy should be able to handle the damages caused by Gustav.
"It's a big personal disaster story, a big regional disaster story. But it shouldn't be big for the economy unless it hits the energy sector hard," said Bob Brusca of FAO Economics.
Experts believe that there is a key to surviving in an economy struck with a handful of troubles: exports. Experts believe agricultural exports could be disrupted by Gustav.
Wyss is quick to point out the five deepwater ports used most often lay on the Mississippi river and in nearby New Orleans. It can take some time for these facilities to become fully operational. For example, the Port of New Orleans was able to resume some basic operations after two weeks of Katrina, but six months later the port was still at 80 percent of normal capacity.
Wyss worries that insurance companies will have to sell assets in order to pay out claims, which will add stress to an already dysfunctional financial sector.
"It is not going to kill them compared to the $500 billion writeoffs they've taken on subprime, but it is more losses," said Wyss.
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