How Did Hurricane Gustav Affect the U.S. Economy?

Question: How Did Hurricane Gustav Affect the U.S. Economy?

Answer: On September 1, 2008, Hurricane Gustav hit the Louisiana shore. Fortunately, it had been reclassified down to a Category 2 storm, less than Hurricane Katrina's Category 3 which had hit three years earlier. At its height, Hurricane Gustav was a Category 4, also less than Hurricane Katrina's Category 5. Even though Gustav was not as strong a storm as Katrina, the economy was in worse shape. Many feared that it would cost the economy more than the $125 billion from Hurricane Katrina.

Although damage was widespread in Louisiana, Hurricane Gustav did not have the same economic impact as Katrina. It caused $2.5-$5 billion in local economic damage, according to the Louisiana Economic Development Department.Gustav headed for the heart of Louisiana's sugar industry, with an estimated $500 million annual crop value, according to the American Sugar Cane League. This area of Louisiana had 50 chemical plants, which produced 25% of the nation's chemicals. The nearby Mississippi coast was home to 11 casinos, which take in $1.3 billion annually. The state suffered $4.5-$10 billion in property damage. This included:

• $2.0-4.5 billion for homes, autos, and other personal property,
• $1.0-2.5 billion for business property,
• $1.5-3.0 billion for damage to agriculture, timber, and fisheries, as well as public facilities.

(Source: AP, "Gustav's possible economic hit is widespread," August 31, 2008; BEA, National Accounts; USA Today, "Katrina damage estimate hits $125B")

Hurricane Impact on Oil Distribution

Gustav caused a greater impact in the oil industry. It caused an estimated loss of $8-$10 billion in oil production. All Gulf offshore oil rigs and Louisiana land-based oil refineries were shut down in advance. Also suspended was shipping of 5.6 million barrels, or 56%, of imported oil that enter the Gulf every day. Louisiana produced 22% of domestic crude oil and 10.5% of natural gas. Hurricane Katrina caused oil prices to rise $3 a barrel. Hurricane Katrina affected 19% of U.S. oil production.Hurricanes Katrina and Rita destroyed 113 offshore oil and gas platforms, damaged 457 oil and gas pipelines, and spilled nearly as much oil as the the Exxon Valdez. (Source: About.com U.S Politics, Gustav: Look For Gas Price Increase, August 31, 2008); CNN.com Gustav Sends Oil HigherAugust 31, 2008; About.com Environment, Hurricane Gustav: How Hurricanes Threaten Offshore Drilling and the Environment)

As important as these industries are, the huge concern was the damage Gustav could do to New Orleans. Hurricane Katrina wrecked $260 million in damage to the port, although it was open to ships just a week later. The city's tourism industry created $9.6 billion annually before Katrina. By the time Gustav hit, it had just returned to attracting 7.1 million visitors each year, up from 2.6 million in 2006. However, Gustav's damage to the port was much less.

Impact on GDP

In 2005, Hurricane Katrina sent GDP growth down to 1.3% in Q4, from 3.8% in Q3. However, since the economy was still growing strongly, by Q1 2006 GDP growth bounced back to a robust 4.8%. By Q2 2008, GDP was only 1.3%. By Q3, it dropped a sickening 3.7% and another 8.9% in Q4 (revised BEA figures). This was NOT caused by Hurricane Gustav, but by the worst recession since the Great Depression. Any economic impact by Hurricane Gustav was lost in the economic freefall, as global financial markets nearly collapsed.

Hurricane Ike

Two weeks later, Hurricane Ike hit. It turned out to be the third costliest hurricane in U.S. history, after Katrina and Hurricane Andrew. Total U.S. property damage was $24.9 billion, more than twice as much as Hurricane Gustav.