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The Economic Effects of Hurricane Katrina
Two economic effects are likely in the fourth quarter of 2005: prices will increase and U.S. economic growth will decrease.
New Orleans is one of the world's busiest ports. The majority of U.S. grain exports, and steel and rubber imports are handled through Gulf ports. Over 25% of U.S. oil demand is met by Gulf of Mexico supplies, and over 90% of it is shipped through Louisiana ports. Constraining supplies cause higher prices. If price increases are sudden and extreme, the economy slows, sometimes into recession.
The U.S. economy has absorbed steadily increasing oil prices in recent years, from $15 per barrel in 1999 to $40 at the end of 2004.
Looking back in time, the most pronounced increase in oil prices occurred in 1979, caused by the Iranian revolution. Prices increased to $95 in inflation-adjusted terms. The result? Skyrocketing inflation: the prime rate reached 21.5% in 1980, followed by deep recession in 1982.
Investments that benefit from inflation? Inflation protection Treasury bonds, consumer price indexed bonds, commodities and basic materials sector stocks such as metals, paper and chemicals.
