We wish to thank Bill Ray for contributing to this special Katrina Report

OVERVIEW: Hurricane Katrina seems certain to be the worst storm in US history in terms of damage to the economy. For example, it may be ten times larger in property loss than Hurricane Andrew that flattened Miami in 1992. A major US city has been entirely evacuated and the employment in that city is now essentially zero. The impact on the national economy is likely to exceed the economic impact of the 9/11 attack. What are those impacts and what does it mean for our industry?

OIL INDUSTRY: Recovery is exceeding the early expectations. All but 4 refineries will be up and running in the next week or two; make-up refinery capacity and imports will cover the gap. Gulf crude oil production will recover but the impact on natural gas supplies will be longer lasting. Low heating oil inventories and high natural gas prices are likely to sharply affect winter heating bills. Retail gasoline prices seem destined to be about $3.00 gal for the next month falling to about $2.50 by year end. Crude oil prices will remain high by historical standards, not falling below $50/bbl under the most optimistic outlook due to world trade conditions. This will slow, but not stop, the economy. But, the entire petroleum supply situation remains very tight and another major disruption due to war, weather, whatever, would be extraordinarily harmful to the economy.

PORT ACTIVITY: The port of New Orleans and related ports are the largest in the nation. These ports are the largest exporter of agricultural commodities and the largest importer of cement. The facilities received no major damage and the channel is being quickly cleared. Houston and Mobile are likely to take up the slack of diverted cargoes. This is major good news.

ECONOMIC FALLOUT: We seem likely to be in for about a one-year adjustment period as these impacts ripple through the economy. For the next two quarters employment will be reduced and consumer spending will go down. High fuel prices and reduced consumer spending will have immediate impacts in business failures, airline bankruptcies, and have an indirect impact on the ailing US auto makers. Inflation will likely approach 4%. The effect on Federal Reserve monetary policy and interest rates is unclear. Most observers think that there will be a pause in the interest rate increases we have seen for the past year. The conventional wisdom is that a national economic recovery will follow this two-quarter dislocation.

Florida, Georgia, and Texas will benefit immediately from activities displaced from the hurricane zone. Residential housing will be increased 150-200,000 starts as a result of Katrina. That is a 10% increase nationally, spread over several years. Housing is otherwise expected to slow because today’s housing starts are not sustainable in terms of either demographics or affordability. The housing price bubble is not expected to burst, although there could be a pull back in some West Coast and Northeast housing markets.

NON-RESIDENTIAL, RECOVERY OR RELAPSE? The answer is, recovery. There are substantial infrastructure repairs in the Katrina affected area. This will add to a good outlook. Nonresidential construction is expected to rise again in 2006 and return to approximately the 2000-2001 level. Non-residential construction had fallen below 80% of this base as recently as last year. Most producers now have strong order files. A good market is expected next year in:

• State and municipal construction due to continued strong tax revenues and deferred spending.
• Lodgings because occupancy rates are at a high point.
• Retail primarily a continuation of the trend in big box, plus previously deferred retail expansions.
• Office because absorptions are expected to turn the corner in many markets next year
• Manufacturing because that sector is finally recovering from a long slide (except auto)
• Health care particularly medical office, specialty facilities, and outpatient care.
• Education as a special subset of state and local, in school districts experiencing growth.
• Parking deck Most of the markets driving parking deck construction are expected to be strong.

BUILDING MATERIAL COSTS: This is the bad news. The Federal budget deficit will shoot up for the next year. This will further weaken the US dollar, making imported cement and steel more expensive. Building materials prices in general will be up in response to the reconstruction demands on the economy.

STEEL PRICE is about as low as it will get. The peak was reached at the end of 2004 and prices have been flat to declining since. Steel price will never return to pre-2004 level because of the weakness of the US dollar, because of energy costs, because the domestic steel industry has consolidated, and because international supply and demand must attract costly new capacity. In addition, US demand will be high due the infrastructure needs affected by Katrina and the strong non-residential construction market. As an industry, this is the time to make major gains in market share compared to steel construction. Will we do it?

CEMENT PRICE will continue to go up one increase at a time. Shortage will ripple through the entire economy. For example, imported cement flowing into Gulf Coast ports will not be available to flow up to the Midwest. The special duty on cement from Mexico shows no sign of going away. The US has offered to lower the duty a small amount. The Mexican government has offered to substitute a quota system for the duties; that would be even worse for US cement users. On the positive side, bulk carriers are expected to be more available next year, making it easier to bring in cement from offshore. Most producers have an opportunity to reduce the cement factor in the mix through better batch plant controls. Many more producers can reduce Portland cement usage 20-30% through the use of fly ash, slag cement and the like. As an industry, I believe we can be effective in breaking the impasse on the Mexican special duty. Will we do it?

LUMBER AND PLYWOOD price has been down since the peak late last year. Reconstruction in the Katrina zone will put heavy demands on lumber and plywood supply, forcing price increases next year.

FURTHER BACKGROUND Several sources were used in the compilation of this article. One excellent source is GlobalInsight, an international economic consulting firm, which operates a public Katrina web page at the following address.

http://www.globalinsight.com/Highlight/HighlightDetail2216.htm