EconSouth (Fourth Quarter 2005)

Southeast Begins the Healing Process

The series of hurricanes that hit the Gulf Coast states and Florida during the late summer and fall sent tremors through the national economy in 2005. Seldom do events in one region of the country have such a significant effect nationwide. However, the Gulf Coast area is one of the primary oil- and gas-producing regions in the United States, and the temporary disruption to oil and gas production in the region had immediate and significant spillover effects across the country.

State Profiles

But other issues besides oil and gas factor into the economic effects of the storms. Hurricanes Katrina, Rita, and Wilma significantly damaged businesses, residences, and infrastructure across a large area. In Mississippi, western Louisiana, and south Florida, the reduced flows of production, income, and spending from the hurricanes should balance out in 2006 as reconstruction activity picks up. But the outlook is less certain for New Orleans, where the size and the pace of rebuilding are difficult to estimate because of the sheer magnitude and the unusual nature of the disaster that devastated the Crescent City.

The hurricanes’ impact on the Southeast’s economic performance is illustrated in the chart. The steep decline in the region’s economic activity in September 2005 was caused by the large hurricane-induced contraction in Mississippi and Louisiana. Economic activity did not decline any further in Mississippi and Louisiana during October, and the region’s overall economic performance turned up again.

Retail is reeling in some areas, rebounding in others
During the first half of 2005, retail sales grew reasonably well in most of the Southeast. But sales were more uneven during the second half of the year. Discount retailers attributed lower sales in the fall to higher fuel prices and unusually warm weather that caused people to postpone some seasonal purchases. Tourism in Florida, however, with its accompanying retail sales, continued to perform well throughout 2005, and the hurricane season benefited some retailers as consumers purchased building materials and replaced damaged items.

Contributions to Southeast Economic Activity through October 2005
Note: The solid line is the employment-weighted average of each state’s index of economic activity. The state-level indexes, developed by the Federal Reserve Bank of Philadelphia, are an average of data on employment, the unemployment rate, wages, and hours worked in manufacturing. Each colored bar represents a state’s contribution to the month-over-month percentage change (annualized) in overall economic activity in the Southeast.

Outside the hurricane-devastated areas, spending could grow at a slightly more modest pace than in 2005. Auto sales in 2005 were driven largely by generous incentive programs by General Motors, Ford, and Chrysler that may not continue in 2006. In addition, mortgage refinancing activity, which has been a strong source of cash for consumers in the past few years, slowed as mortgage rates rose in 2005. Higher interest rates will also push up variable-interest debt service costs, and this development will likely cut into some consumers’ discretionary spending. In contrast to the rest of the Southeast, the inflow of funds from insurance settlements, government loans, and other aid to the hurricane-affected areas will likely translate into stronger regional retail sales, especially for home-related products.

Housing may take a hiatus
Three important factors influenced the Southeast’s residential real estate sector during 2005. The first is the strength of Florida’s housing markets, driven by robust levels of immigration and job growth within the state and supported by demand from real estate investors. The second factor is relatively low mortgage interest rates, which kept housing affordable in most markets despite rising home prices. The third factor is the direct impact of property destruction and damage caused by the hurricanes and the subsequent spillover to other residential and commercial markets in the Southeast as families and businesses relocated.

Overall, Southeastern housing markets should be more subdued in the coming year than they were in 2005. While the level of housing activity is likely to remain quite robust, the rise in interest rates in 2005 is likely to dampen housing demand growth, especially in the condominium market. Even though reconstruction efforts and the relocation of displaced families will significantly boost certain Gulf Coast areas, higher construction costs related to shortages of materials and labor may restrain the overall pace of construction in 2006.

Commercial real estate in check
Southeastern commercial real estate markets enjoyed improved demand during 2005 prior to the hurricanes. Vacancy rates remained high but trended lower in most areas, the amount of subleased space declined, and the net absorption of vacant space was positive across most markets. As a result, landlords were able to reduce the size of price concessions.

Construction levels also improved modestly across the region as several firms moved ahead with expansion plans and developers broke ground on new office developments. However, some developers cited escalating material costs as a limiting factor.

Photo courtesy of the Federal Emergency Management Agency
This New Orleans neighborhood was still underwater three weeks after Hurricane Katrina plowed through.

The destruction of commercial property along the Gulf Coast from the hurricanes was extensive, and some industry experts anticipate that rebuilding all the commercial structures may take anywhere from two to five years. Immediately after the storms, demand for commercial space surged in cities surrounding the most heavily affected areas as many businesses relocated. It is unclear how many of these businesses will return to their previous locations. Outside the hurricane-damaged areas, higher building costs and labor shortages may continue to restrain commercial development in 2006.

Tourism and hospitality hobbled by hurricanes
The hurricanes delivered a crippling blow to portions of the region’s tourism and hospitality industries in 2005. For instance, all 13 water-based casinos along the Mississippi coast were either torn apart or beached during Hurricane Katrina. This damage devastated the area’s tourist trade, eliminating half a million dollars a day in state tax revenue and leaving as many as 14,000 people jobless. Katrina also shut down New Orleans’ tourist and convention industry, erasing thousands of jobs and leaving many parts of the city’s tourist infrastructure damaged or destroyed. Both Hurricanes Katrina and Wilma disrupted south Florida’s booming tourist trade, but the state’s tourism industry as a whole is likely to still post record visitor numbers during 2005.

The outlook for the industry is mixed in 2006. Rebuilding of hurricane-damaged areas could eventually result in the modernization and upgrading of some attractions and facilities. In the short term, though, most Gulf Coast facilities are closed, and tourism officials in Florida worry that high gasoline costs and the prospects for more storms in 2006 could deter some travelers.

Other services sector payrolls on the rise
Several service industries contributed positively to economic growth during 2005. Outside of the hurricane-devastated areas—and especially in Florida—management consulting, architectural and engineering firms, as well as health service providers and temporary staffing firms added significantly to payrolls. In Mississippi and Louisiana, businesses and government agencies are also using temporary staffing firms to obtain workers to help with demolition, cleanup, and repair work after the hurricanes.

Damage from Hurricane Katrina is evident throughout the Gulf Coast. This water tower toppled onto a house in Buras, La.

The outlook for the Southeast’s service sector in 2006 is generally good. The region’s expanding aging population should continue to provide for growth in the health service sector. Hurricane-related rebuilding will boost demand for services such as engineering and architecture. The demand for temporary workers should continue to be high, bolstered by hurricane rebuilding needs in a variety of industries.

Durables jump while nondurables step back
Total employment in Southeastern manufacturing outside of Mississippi and Louisiana was stable in 2005. Small gains in the durable goods sector were largely offset by continuing losses in the nondurable sector. But the hurricanes temporarily disrupted several major manufacturing industries in the Gulf Coast region, including the shipbuilding, refining, and chemical industries. Production losses stemmed from a combination of facility damage and temporary shortages of inputs.

The outlook for some of the region’s manufacturing industries is relatively bright. For instance, the furniture, wood products, carpet, and other building-related industries should benefit from hurricane-related repairs and reconstruction activity in 2006. Furthermore, higher energy prices could lead to an increased level of investment in the energy sector, which will boost some oil- and gas-related industries in 2006.

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