EconSouth (Fourth Quarter 2006)

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Volume 8, Number 4
Fourth Quarter 2006


Housing, Energy Loom Large in '07

Southeastern Economy to Grow Modestly in 2007

Global Outlook Generally Bright in '07

Carpeting on a Roll in Georgia


Fed @ Issue

Q & A

Research Notes & News

Southeastern Economic Indicators




Louisiana Continues March Toward Recovery

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Louisiana's "Road Home" program
Recovery was the byword for Louisiana's economy in 2006. Most activity was geared to replacing destroyed property and restarting the basic economic engines that power the state's spending and income growth. However, the road to full recovery is still long and marked by uncertainty. Compared with 2006, the pace of economic activity should accelerate in 2007 as more construction will occur in and around New Orleans. However, some key industries, such as tourism, are likely to continue to struggle.

In general, the largest economic impact of a hurricane is the destruction of property, such as homes, places of business, and equipment. The replacement of this property provides a significant temporary boost to spending and income, albeit sometimes with a delay because of lags in the flow of insurance and government funds.

State Profiles

This increased spending was evident in Louisiana in 2006. Purchases of replacement household goods, automobiles, and other products prompted a significant increase in per capita consumer spending.

post-hurricane Louisiana home
Photo by Boston Productions Inc.

After considerable delay, the state also is starting to experience the stimulus that residential and nonresidential construction brings (see the sidebar for a discussion of The Road Home program and its expected impact on housing). For example, state tax revenues have been strong since cleanup and rebuilding began, and some analysts anticipate the budget surplus for the current fiscal year may run as high as $800 million. In contrast, during the fiscal year that ended on June 30, the state was forced to make more than $431 million in cuts to balance its budget.

Other types of economic activity have been slow to recover. Part of this delay reflects the state's smaller posthurricane population, a reduction that has dampened the overall level of demand for services such as health care and education. But part of this delay also reflects problems specific to certain industries, such as the critically important tourism industry.

post-hurricane Louisiana home-building
Photo by Boston Productions Inc.
Following "The Road Home"

The long-term solution to the housing situation in New Orleans may depend upon the success of The Road Home, a state-administered program designed to assist displaced homeowners whose residences were significantly damaged or destroyed by Hurricanes Katrina and Rita.

The program includes homeowner-assistance grants, which will be awarded up to $150,000 based on considerations that include the level of damage and the owner's commitment to repair, rebuild, or relocate within the state. Homeowners also have the option of selling their home to the state with no commitment to resettle in their community.

The Road Home is touted as the largest single housing-recovery program in U.S. history and has received nearly 87,000 applications from homeowners through early December.

Housing still finding its legs
Much of the effort in New Orleans during 2006 has focused on tackling the extensive cleanup and debris removal required to allow housing and nonresidential rebuilding to begin. As a result, new home construction in the city has been modest. Labor shortages and delays in issuing new building regulations also presented obstacles.

Nonetheless, housing activity has been brisk in Louisiana's other metropolitan areas where the local populations grew significantly after the storms. While New Orleans–based employment decreased by approximately 130,000 jobs in the months immediately following the storms, employment in Baton Rouge increased by about 20,000. Not surprisingly, Baton Rouge's housing activity has increased dramatically as a result.

Nonresidential construction
Infrastructure repairs and road improvements began in early 2006, and the pace of commercial construction gathered momentum as the year progressed. Baton Rouge's commercial real estate market remained particularly tight, but several new projects have been slated for 2007. In contrast, the New Orleans office market is experiencing very high vacancy rates because many firms left or significantly scaled back their presence in the city. Numerous anticipated infrastructure projects in and around New Orleans, together with expansions elsewhere in the state, will boost the construction sector in the coming year.

Services mixed; tourism struggles to rebound
Employment in the professional and business services sector in Louisiana declined sharply in the wake of the hurricanes, but employment in this sector appeared to have returned to near-prestorm levels by early 2006. Anecdotal reports suggest that professional and technical services linked to the energy and construction industries, as well as temporary employment services, added to employment payrolls during 2006.

In contrast, employment in the health care and educational service industries were lower in 2006, reflecting the population shift out of the state and the extensive damage suffered by health and educational facilities in New Orleans.

The leisure and hospitality industry struggled to rebound in 2006. Conventions slated for New Orleans moved to other venues and tourists sought alternative vacation destinations. Approximately 20,000 workers in the accommodation and food services industry lost their jobs in the wake of the storms, and relatively few of those jobs have come back. New Orleans International Airport's passenger traffic illustrates the tourism industry's downturn (see the chart). During the 12 months prior to the hurricanes, an average of 411,000 passengers arrived each month. During the first nine months of 2006 that number has averaged 246,000, a 40 percent decline.

New Orleans International Airport Traffic, 2004–2006
New Orleans airport traffic chart
Note: Data are through September
Source: New Orleans Aviation Board

The outlook for service-providing industries in Louisiana is mixed. The leisure and hospitality industry should improve in 2007, although there is considerable uncertainty about the strength of the recovery. The resumption of football in the Superdome, a refurbished Morial Convention Center, and the return of cruise ships are strong positive steps in New Orleans, but convention business has not picked up appreciably. Meanwhile, the health care and educational segments will remain below prestorm levels and will expand as evolving demographic trends demand.

Manufacturing makes up ground
Although occupying only about 8 percent of overall employment in the state, the manufacturing sector contains relatively high-paying jobs in the shipbuilding, chemical, and energy industries. Employment in Louisiana's factory sector declined by about 5 percent immediately after 2005's hurricanes, and the shuttering of manufacturing plants in the New Orleans area accounted for most of that decline. Since then, manufacturing employment in the New Orleans area remains significantly lower than a year earlier.

In 2007, the state's manufacturing sector should improve modestly. New long-term defense contracts will stabilize the shipbuilding industry. Chemical and plastics producers have enjoyed lower natural gas prices, and their performance in 2007 will remain tied closely to energy prices. Firms supplying equipment to the state's oil and gas industry will likely continue to experience strong demand in 2007. Supporting the local manufacturing base, the state's ports have recovered impressively, with export tonnage at Louisiana's ports having returned to prehurricane levels.

Louisiana Employment: Better Than the Data Suggest

As noted in "Fed at Issue," the Bureau of Labor Statistics (BLS) has announced that the March 2006 estimate for nonfarm payroll employment in the United States is expected to be revised upward by 810,000, or 0.6 percent. The BLS will publish the details in February 2007.

The table presents an Atlanta Fed estimate of the employment discrepancies between the unemployment insurance (UI) tax records and the Current Employment Statistics (CES) estimates for states in the Southeast. This analysis suggests that the largest revision will be for Louisiana, where data collection in the CES survey following the 2005 hurricanes has been extremely difficult. The CES data indicate that payroll employment in Louisiana declined by 164,500 between March 2005 and March 2006. However, the UI data suggests the decline was roughly 86,600 jobs, or about half the CES estimate.

Much of the revision error apparently can be attributed to underestimating job growth in the state's construction industry. According to CES figures, construction employment declined by 9 percent between March 2005 and March 2006, whereas the UI tax data indicate that construction employment actually expanded by 12 percent over that period. New construction businesses that are not yet part of the regular CES sample probably account for much of this discrepancy.

Professional and business services is another industry where employment in Louisiana appears to have been significantly underestimated. In contrast, employment in the government sector (state and local) appears to have been overestimated; the UI tax data suggest an almost 9 percent decline from March 2005 to March 2006 rather than the modest 2 percent decline reported in the CES estimates.

CES Employment Data and Estimated Revisions
CES estimate of statewide employment
Estimated revision to CES employment estimates
Percent revision to CES employment estimates
Notes: Data are current as of March 2006. Figures are in thousands.
Source: Bureau of Labor Statistics and Atlanta Fed calculations