December 2005

Dr. James A. RichardsonAlumni Professor of Economics

Louisiana State University

Global and National Economic Backdrop

RGDP

Interest Rates

Energy Prices

RGDPRGDP

Quarter RGDP

05-I 3.8%

05-II 3.3%

05-III 3.8%

RGDP Forecasts(9/05)RGDP Forecasts(9/05)

Quarter Global Insight Pre-Katrina/Rita

05-I 3.8%

05-II 3.3%

05-III 3.8% (4.4%)

05-IV 2.8%* (3.3%)

06-I 3.6% (3.0%)

06-II 3.7% (3.0%)

06-III 3.0%

06-IV 2.7%

Hurricane Effects to National Economy: Second Half ‘05

• Negatives factors:– Disruption of normal activities, especially

shipping– Surge in gasoline & natural gas prices will

squeeze consumer spending

• Note: New Orleans only about 0.4% of national economy

• All 3 states impacted: total component of RGDP=3.1%

Hurricane Effects to National Economy: First Half ‘06

• Hurricanes destroy wealth; rebuilding wealth creates lots of new spending.

• Residential, non-residential, and public infrastructure spending will dominate the jump in RGDP—question is how fast in New Orleans area?

4

6

8

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18

1975 1980 1985 1990 1995 2000 2005

Fig. 1: 30-Year Fixed Mortgage Rate

2005-II to 2007-IV:Up 112 Basis Points

Source: Global Insights, 9/05

Rate

Last Year:+120 basis pts: 04II-05IV Actual: -42

0

10

20

30

40

50

60

1975 1980 1985 1990 1995 2000 2005

Fig. 3: Price of Louisiana Sweet Crude

OPEC Upper

OPEC Lower

Price ofLouisiana Sweet

Pri

ce p

er B

arre

l

Shut-in Production: Oil

0 10 20 30 40 50 60 70 80 90

Ivan

0

500000

1000000

1500000

barr

els

per

day

days after landfall

Ivan Katrina/Rita

0

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1975 1980 1985 1990 1995 2000 2005

Fig. 4: Price of Natural Gas - Louisiana$

Per

MM

BT

U

2006: $8.002007: $8.00

Shut-in Production: Natural Gas

0 10 20 30 40 50 60 70 80 90

Ivan

0

2000

4000

6000

8000

MM

CF

per

day

days after landfall

Ivan Katrina/Rita

Katrina & Rita

1. Katrina hit August 29

2. Rita hit September 23

Katrina: One of Largest Disaster in History

• Katrina: $200b+

• 1988 Drought/Heat $61.6b

• 1980 Drought/Heat $48.4b

• Andrew: $27b

• ’93 Midwest flood $26.7b

• Charley: $14b

Impacts on New Orleans

440

480

520

560

600

640

680

1975 1980 1985 1990 1995 2000 2005

Fig. 5: New Orleans MSA Non-Farm Employment Pret-Katrina Forecast

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Pre

-K F

ore

cast

2006

-07:

+ 1

8,00

0 Jo

bs

-8.3%Decline

2002-03:-10,300 jobs (-1.7%)

X St. James removed

Pre-Katrina Forecast:2006-07: +18,000 jobs

Source of 18,000 N.O. Jobs?

• Eight $100 mm+ construction projects– Convention Center, LNG project, Huey Long

Bridge expansion, Valero Refining, North Shore Marina Towers near Slidell, Plaza Towers Building in New Orleans, Hotel connected with land based casino, and Crescent City Power Plant

• Textron Marine & Land• Bollinger Shipyards

Industries in New Orleans Not Expected to Contribute to Growth, Pre-Katrina

• Northup Grumman Shipyards—cut up to 800 jobs; cannot go below 5,200 because of contract with state

• Lockheed Martin Space Systems—must replace contracts for external fuel tank for NASA’s spacecraft

• Chemical Industries and Refineries• National Finance Center

Katrina/Rita Effects

New Orleans MSA

Displaced Persons: Louisiana

• Population of the “bowl”:2004– Orleans: 462.3

– Jefferson: 453.6

– St. Bernard: 65.6

– Plaquemines: 29.0

– Total in Bowl 1,010.5

– + St. Tammany: 213.6

– +St. Charles 50.1

– St. John the Bap. 45.6

– Total Area hit: 1,319.8

Impact on Housing Stock:Red Cross on Katrina & Rita

November 8, 2005• Impact: Number• Destroyed 137,502 (Un-inhab.)• Major 73,846 (Un-inhab.)• Minor 70,689• Affected 188,656• Inaccessible 2,489• TOTAL 473,182• 12 times next worst disaster in U.S. history

Andrew and Hugo Comparison

• Hurricane Andrew destroyed 28,153 houses in Florida; damaged 137,561 others; confidence in rebuilding was weak; only 2% of severely damaged homes had been completely rebuilt after six months.

• Hurricane Hugo devastated Charleston, South Carolina in 1989—almost 10,000 homes destroyed and over 110,000 damaged; Charleston was substantially rebuilt in six months and almost totally rebuilt within one year; everyone was confident about the rebuilding process

Insurance Implications

• Once water in a home: Flood, not homeowners, insurance– Lesser of 80% of depreciated value of home

or $250,000– $500k home; takes $400k to repair: must

come up with $150k to rebuild– Many homeowners had zero flood insurance

• Business interruption coverage may not be operable once water in building

Other Obstacles to Rebuild?

• Debris removal: higher probability of contaminants

• Stricter building codes ahead?– Stronger design for home—passed in special session– Loss exceeds 50% of pre-flood price, must elevate to

new base flood elevation– Cost of building homes in New Orleans will increase

• Getting mortgage and insurance when levee system still questionable?

• Result? Much repair work at a standstill—Confidence Issue

Model for Forecasting New Orleans MSA

• Recovery limited by availability of housing• In New Orleans Metropolitan Area, 207,576

houses are uninhabitable.• 2.42 persons per home = 502,334 persons (38%

of population)• Pre-K: Non-farm employment=621,000• Post-K: Down 38% or -236,000 jobs• 2006: none of un-inhabitable rebuilt• 2007: ½ of major damaged homes rebuilt

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1980 1985 1990 1995 2000 2005

Fig. 6: New Orleans MSA Non-Farm Employment Post-Katrina Forecast

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Pre-K Forecast2006-07: + 18,000 JobsPost-K Forecast:2005: -70,600 Jobs2006: -208,300 Jobs2007: +31,100 Jobs

-8.3%Decline

2002-03:-10,300 jobs (-1.7%)

X St. James removed

Key Issue: Housing In New Orleans Metropolitan Area

• Real issue is housing in Orleans Parish• But this affects other parishes• Cannot replace half of million people with trailer

parks and tents• Importance of Richard Baker Proposal: creation of

Louisiana Recovery Corporation to settle outstanding mortgages, give property owners option to sell and repurchase at later date, and make infrastructure improvements

Other Sobering Facts about New Orleans

• Over 100,000 homes that cannot get power until wiring has been checked by licensed electrician.

• Meager job growth in 1990s; loss of employment in first part of the 2000s; and then modest growth in 2004.

• New Orleans was not hotspot of state in terms of economic development

New Orleans Employment Relative to Statewide Employment

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34

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38

1965 1970 1975 1980 1985 1990 1995 2000 2005

Putting the Puzzle Togetherto Rebuild New Orleans

Housing

Jobs and Economic Development

Public Service

Facilities

Enterprising Spirit, Creativity,And Risk Taking

Public Policy

New Orleans needs a blend

• Public policy decisions make quickly and forthrightly

• A dose of the wild west mentality—we want to encourage risk taking and creativity for all types of industrial and commercial ventures

Baton Rouge MSA Outlook

Pre-Katrina

200

240

280

320

360

1980 1985 1990 1995 2000 2005

Fig. 8: Baton Rouge MSA Non-Farm Employment Pre-Katrina Forecast

Statewide Recession: -9.0%BTR: -2.2%-4,800 Jobs

2001-02:-5,400 Jobs (-1.8%)

Pre-Katrina Forecast2006-07: +8,800 jobs

X Five Parishes Added

Source of 8,800 New Jobs Baton Rouge MSA?

• Construction– Shintech $1 billion

– Two expansions at Dow Chemicals

– Georgia Pacific: $160 mm boiler steam unit

– OLOL: $130 mm-heart center and children’s wing

– BTR General: $80 mm expansion

– 7 other $50mm+ projects

• Trinity Shipyards: +150 jobs• LA Generating: $1 bill expansion Big Cajun II?

Post-Katrina Impacts :Baton Rouge MSA

• From FEMA Assistance Applications:– MSA population increased 248,386 overnight– 34% increase!

• Population will not permanently remain quarter million higher

• BTR population size limited by job availability

Post-Katrina Impacts :Baton Rouge MSA

• Our Model for BTR?– Population will settle in at +50,000– Source?

• Permanent transfer of some New Orleans area firms to baton Rouge

• Baton Rouge will serve as bedroom community to many people working in New Orleans and commuting. We get retail and service business fallout.

– +50,000 population means permanent job increase of 23,300

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240

280

320

360

400

1980 1985 1990 1995 2000 2005

Fig. 9: Baton Rouge MSA Non-Farm Employment Post-Katrina Forecast

Statewide Recession: -9.0%BTR: -2.2%-4,800 Jobs

2001-02:-5,400 Jobs (-1.8%)

Pre-Katrina Forecast2006-07: +8,800 jobsPost-Katrina Forecast:2005: +6,000 Jobs 05IV2006: +26,300 Jobs2007: +4,300 Jobs

Five Parishes Added X

Impact on Other MSAs

• Lafayette – 5,200 jobs in 2006 and 1,600 jobs in 2007 (130,000 jobs currently)

• Houma—4,600 jobs in 2006 and 1,600 jobs in 2007 (80,000 jobs currently)

• Lake Charles—500 jobs in 2006 and 700 jobs in 2007 (currently 85,000 jobs)

• MSAs above Interstate 10—impact of Katrina and Rita minimal

• Rural Parishes—impact possibly in Tangipahoa Parish which could provide bedroom community for persons working in New Orleans, but not having housing

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1975 1980 1985 1990 1995 2000 2005

Fig. 24: Louisiana Non-Farm Employment Pre- v. Post-Katrina/Rita Forecast

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Pre- v. Post Katrina/Rita Forecast: 2005: -73,800 Jobs 2006: -260,300 Jobs 2007: +47,700 Jobs

Pre-K&R

Post-K&R

The Ultimate Tradeoff

• New Orleans as regional economic area cannot recover faster than housing can be provided, social facilities are available, and citizens can feel secure about their safety—this may be five to ten years. It will surely not be six to twelve months.

• Citizens cannot wait 5 years to get back to normalcy.

Issues Facing State and New Orleans

• Define new building codes; flood plains; rules and regulations of neighborhood restoration

• Policy for electricity restoration—cost of rebuilding infrastructure and cost per customer

• Property tax reassessment—covering outstanding bonds

Benchmarks for New Orleans

• What happens in January—private universities—how successful in their re-opening

• Schools opening in January, August• Financial viability of health care providers• Madri-Gras, Jazz Fest, and other unique attributes

of New Orleans• Major convention in July---can it handle a

convention of 20,000 or so

Attitude about New Orleans

• Must first be realistic– Port– Oil and Gas– The Saints– Its Charm

• Optimistic about long-term—New Orleans will recover

Inspiration from John Stuart Mill

• “…what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war.” (Principles of Political Economy, Book 1, Chapter 5)

December 2005

Dr. James A. RichardsonAlumni Professor of Economics

Louisiana State University