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December 2005

Louisiana Economic Outlook (Special Emphasis on New Orleans Area). December 2005. Dr. James A. Richardson Alumni Professor of Economics Louisiana State University. Global and National Economic Backdrop. RGDP Interest Rates Energy Prices. RGDP. Quarter RGDP 05-I 3.8%

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December 2005

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  1. Louisiana Economic Outlook (Special Emphasis on New Orleans Area) December 2005 Dr. James A. Richardson Alumni Professor of Economics Louisiana State University

  2. Global and National Economic Backdrop RGDP Interest Rates Energy Prices

  3. RGDP QuarterRGDP 05-I 3.8% 05-II 3.3% 05-III 3.8%

  4. RGDP Forecasts(9/05) QuarterGlobal InsightPre-Katrina/Rita 05-I 3.8% 05-II 3.3% 05-III 3.8% (4.4%) 05-IV 2.8%* (3.3%) 06-I 3.6% (3.0%) 06-II 3.7% (3.0%) 06-III 3.0% 06-IV 2.7%

  5. Hurricane Effects to National Economy: Second Half ‘05 • Negatives factors: • Disruption of normal activities, especially shipping • Surge in gasoline & natural gas prices will squeeze consumer spending • Note: New Orleans only about 0.4% of national economy • All 3 states impacted: total component of RGDP=3.1%

  6. Hurricane Effects to National Economy: First Half ‘06 • Hurricanes destroy wealth; rebuilding wealth creates lots of new spending. • Residential, non-residential, and public infrastructure spending will dominate the jump in RGDP—question is how fast in New Orleans area?

  7. Shut-in Production: Oil

  8. Shut-in Production: Natural Gas

  9. Katrina & Rita Katrina hit August 29 Rita hit September 23

  10. Katrina: One of Largest Disaster in History • Katrina: $200b+ • 1988 Drought/Heat $61.6b • 1980 Drought/Heat $48.4b • Andrew: $27b • ’93 Midwest flood $26.7b • Charley: $14b

  11. Impacts on New Orleans

  12. F i g . 5 : N e w O r l e a n s M S A N o n - F a r m E m p l o y m e n t P r e t - K a t r i n a F o r e c a s t 680 2 0 0 2 - 0 3 : - 1 0 , 3 0 0 j o b s 640 ( - 1 . 7 % ) s b o 600 J 0 s 0 d t 0 s n , a a 8 c s 1 560 e u r + o o : h F 7 X S t . J a m e s r e m o v e d T 0 K - 6 - 520 e 0 r 0 P 2 - 8 . 3 % P r e - K a t r i n a F o r e c a s t : 2 0 0 6 - 0 7 : + 1 8 , 0 0 0 j o b s D e c l i n e 480 440 1975 1980 1985 1990 1995 2000 2005

  13. Source of 18,000 N.O. Jobs? • Eight $100 mm+ construction projects • Convention Center, LNG project, Huey Long Bridge expansion, Valero Refining, North Shore Marina Towers near Slidell, Plaza Towers Building in New Orleans, Hotel connected with land based casino, and Crescent City Power Plant • Textron Marine & Land • Bollinger Shipyards

  14. Industries in New Orleans Not Expected to Contribute to Growth, Pre-Katrina • Northup Grumman Shipyards—cut up to 800 jobs; cannot go below 5,200 because of contract with state • Lockheed Martin Space Systems—must replace contracts for external fuel tank for NASA’s spacecraft • Chemical Industries and Refineries • National Finance Center

  15. Katrina/Rita Effects New Orleans MSA

  16. Displaced Persons: Louisiana • Population of the “bowl”:2004 • Orleans: 462.3 • Jefferson: 453.6 • St. Bernard: 65.6 • Plaquemines: 29.0 • Total in Bowl1,010.5 • + St. Tammany: 213.6 • +St. Charles 50.1 • St. John the Bap. 45.6 • Total Area hit: 1,319.8

  17. Impact on Housing Stock:Red Cross on Katrina & RitaNovember 8, 2005 • Impact: Number • Destroyed 137,502 (Un-inhab.) • Major 73,846 (Un-inhab.) • Minor 70,689 • Affected 188,656 • Inaccessible 2,489 • TOTAL 473,182 • 12 times next worst disaster in U.S. history

  18. Andrew and Hugo Comparison • Hurricane Andrew destroyed 28,153 houses in Florida; damaged 137,561 others; confidence in rebuilding was weak; only 2% of severely damaged homes had been completely rebuilt after six months. • Hurricane Hugo devastated Charleston, South Carolina in 1989—almost 10,000 homes destroyed and over 110,000 damaged; Charleston was substantially rebuilt in six months and almost totally rebuilt within one year; everyone was confident about the rebuilding process

  19. Insurance Implications • Once water in a home: Flood, not homeowners, insurance • Lesser of 80% of depreciated value of home or $250,000 • $500k home; takes $400k to repair: must come up with $150k to rebuild • Many homeowners had zero flood insurance • Business interruption coverage may not be operable once water in building

  20. Other Obstacles to Rebuild? • Debris removal: higher probability of contaminants • Stricter building codes ahead? • Stronger design for home—passed in special session • Loss exceeds 50% of pre-flood price, must elevate to new base flood elevation • Cost of building homes in New Orleans will increase • Getting mortgage and insurance when levee system still questionable? • Result? Much repair work at a standstill—Confidence Issue

  21. Model for Forecasting New Orleans MSA • Recovery limited by availability of housing • In New Orleans Metropolitan Area, 207,576 houses are uninhabitable. • 2.42 persons per home = 502,334 persons (38% of population) • Pre-K: Non-farm employment=621,000 • Post-K: Down 38% or -236,000 jobs • 2006: none of un-inhabitable rebuilt • 2007: ½ of major damaged homes rebuilt

  22. Key Issue: Housing In New Orleans Metropolitan Area • Real issue is housing in Orleans Parish • But this affects other parishes • Cannot replace half of million people with trailer parks and tents • Importance of Richard Baker Proposal: creation of Louisiana Recovery Corporation to settle outstanding mortgages, give property owners option to sell and repurchase at later date, and make infrastructure improvements

  23. Other Sobering Facts about New Orleans • Over 100,000 homes that cannot get power until wiring has been checked by licensed electrician. • Meager job growth in 1990s; loss of employment in first part of the 2000s; and then modest growth in 2004. • New Orleans was not hotspot of state in terms of economic development

  24. New Orleans Employment Relative to Statewide Employment

  25. Putting the Puzzle Togetherto Rebuild New Orleans

  26. New Orleans needs a blend • Public policy decisions make quickly and forthrightly • A dose of the wild west mentality—we want to encourage risk taking and creativity for all types of industrial and commercial ventures

  27. Baton Rouge MSA Outlook Pre-Katrina

  28. Source of 8,800 New Jobs Baton Rouge MSA? • Construction • Shintech $1 billion • Two expansions at Dow Chemicals • Georgia Pacific: $160 mm boiler steam unit • OLOL: $130 mm-heart center and children’s wing • BTR General: $80 mm expansion • 7 other $50mm+ projects • Trinity Shipyards: +150 jobs • LA Generating: $1 bill expansion Big Cajun II?

  29. Post-Katrina Impacts :Baton Rouge MSA • From FEMA Assistance Applications: • MSA population increased 248,386 overnight • 34% increase! • Population will not permanently remain quarter million higher • BTR population size limited by job availability

  30. Post-Katrina Impacts :Baton Rouge MSA • Our Model for BTR? • Population will settle in at +50,000 • Source? • Permanent transfer of some New Orleans area firms to baton Rouge • Baton Rouge will serve as bedroom community to many people working in New Orleans and commuting. We get retail and service business fallout. • +50,000 population means permanent job increase of 23,300

  31. Impact on Other MSAs • Lafayette – 5,200 jobs in 2006 and 1,600 jobs in 2007 (130,000 jobs currently) • Houma—4,600 jobs in 2006 and 1,600 jobs in 2007 (80,000 jobs currently) • Lake Charles—500 jobs in 2006 and 700 jobs in 2007 (currently 85,000 jobs) • MSAs above Interstate 10—impact of Katrina and Rita minimal • Rural Parishes—impact possibly in Tangipahoa Parish which could provide bedroom community for persons working in New Orleans, but not having housing

  32. The Ultimate Tradeoff • New Orleans as regional economic area cannot recover faster than housing can be provided, social facilities are available, and citizens can feel secure about their safety—this may be five to ten years. It will surely not be six to twelve months. • Citizens cannot wait 5 years to get back to normalcy.

  33. Issues Facing State and New Orleans • Define new building codes; flood plains; rules and regulations of neighborhood restoration • Policy for electricity restoration—cost of rebuilding infrastructure and cost per customer • Property tax reassessment—covering outstanding bonds

  34. Benchmarks for New Orleans • What happens in January—private universities—how successful in their re-opening • Schools opening in January, August • Financial viability of health care providers • Madri-Gras, Jazz Fest, and other unique attributes of New Orleans • Major convention in July---can it handle a convention of 20,000 or so

  35. Attitude about New Orleans • Must first be realistic • Port • Oil and Gas • The Saints • Its Charm • Optimistic about long-term—New Orleans will recover

  36. Inspiration from John Stuart Mill • “…what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war.” (Principles of Political Economy, Book 1, Chapter 5)

  37. Louisiana Economic Outlook (Special Emphasis on New Orleans Area) December 2005 Dr. James A. Richardson Alumni Professor of Economics Louisiana State University

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