Our initial estimate of the impact of Hurricane Katrina is marginally negative for construction spending and equipment demand for several weeks, then more substantially positive. The impact on materials prices is clearly negative. The impact on the overall economy will be 0.5 percent lower growth in GDP for the rest of this year offset by 0.5 percent higher growth early next year.
The feedback from the economy will have a larger impact on the construction market than the initial plunge and later surge in construction spending in the affected region. This is a small market with recently sluggish construction activity.
New Orleans, Biloxi and Gulfport accounted for only 0.4 percent of total residential building permits this year through July. Virtually all ongoing and scheduled projects have been cancelled in these cities. Other metropolitan areas within 100 miles accounted for 0.6 percent of permits with the largest share in Baton Rouge. Projects in this area will be delayed for many months by the diversion of labor, equipment and materials.
We do not yet know the scale and timing of repair and replacement construction. Already, construction for clean up as well as port, energy facility, and public infrastructure repair is underway and will be most significant in September and October. It will proceed without budget constraints or bureaucratic delays. Construction work for building repair will not be significant until the end of September, later in the flooded areas. This work will take much longer, probably peaking late this year but continuing through next year. Not all buildings will be repaired, but demolition will partially substitute for repair.
Construction spending for building and infrastructure replacement will not be significant until at least the end of the year. Not all destroyed buildings will be replaced and some of them will be replaced in Baton Rouge or other refugee centers instead of in New Orleans. What share will be replaced is the key unknown for the construction outlook. The answer depends on federal appropriations and refugee attitudes about returning to live below sea level.
The key unknown for the economy, and the feedback on construction, is how much spending confidence consumers lose because of sharply higher energy prices. The sharp drop in auto travel over the Labor Day weekend is an ominous sign that many households are now much more cautious about spending. But this can dissipate quickly if the spike in gasoline prices is reversed quickly.
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