Assessing the Impact of Hurricanes Katrina and Rita

Abstract

In the summer of 2005, while the U.S. economy was growing comfortably despite a few longstanding concerns over deficits and outsourcing, storms were brewing off the Gulf Coast. On August 25, 2005, Hurricane Katrina blasted New Orleans, Louisiana, and the surrounding coastal areas in the Gulf of Mexico. Barely a month later, a second storm, Hurricane Rita, swept through the Gulf region to make landfall between Sabine Pass, Texas, and Johnson's Bayou, Louisiana. Speculation over their likely impact on the world energy markets and the U.S. economy began as soon as the hurricanes were forecast to strike the oil-rich Gulf region. This case documents the paths of the storms and provides a summary of the Congressional Budget Office's estimates of the storms' impact on the U.S. economy. It is designed for use in the first year Global Economies and Markets course to teach the concept of national income accounts. It can also be used to analyze the impact of exogenous shocks

Excerpt

UVA-BP-0490

ASSESSING THE IMPACT OF HURRICANES KATRINA AND RITA

The combined losses of Hurricanes Katrina and Rita are likely to surpass those from the costliest hurricane previously on record (Andrew) and the three costliest disasters in recent history (Hurricane Andrew, the September 2001 terrorist attacks, and the Northridge earthquake).

—Douglas Holtz-Eakin, Director, Congressional Budget Office, speaking before the Committee on the Budget, U.S. House of Representatives, October 6, 2005

In the summer of 2005, while the U.S. economy was growing comfortably despite a few longstanding concerns over deficits and outsourcing (Exhibit 1), storms were brewing off the Gulf Coast. On August 25, 2005, Hurricane Katrina blasted New Orleans, Louisiana, and the surrounding coastal areas in the Gulf of Mexico and sent shockwaves from the oil-rich Gulf region to the rest of the country. Barely a month later, a second storm, Hurricane Rita, swept through the Gulf region to make landfall between Sabine Pass, Texas, and Johnson's Bayou, Louisiana. Speculation over their likely impact on the local economy and the nation's oil supply began as soon as the hurricanes were forecast to strike the oil-rich Gulf region. To some, it seemed that high energy prices on the world market (Exhibit 2) and the massive losses in New Orleans would have the potential to send the robust U.S. economy into a recession. Would the substantial momentum of the world's largest economy carry the day or was summer finally over?

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Keywords: economic analysis