1. Paul E. Polzin Bureau of Business and Economic Research The University of Montana - Missoula Hurricane Katrina and the Montana Economy

2. Katrina Economic Impacts Direct Impacts –Lake Charles, LA to Mobile, AL is a sizable economic region with about 2.5 million people. –Storm destruction is a one-time loss of GDP. Total losses likely to exceed $100 B. –Katrina will have negative impacts on US economy in 2005QIII and QIV. –Reconstruction will buoy US economy in 2006QI, 2006QII and thereafter. 2005QIII and QIV2006QI and QII Before KatrinaAfter KatrinaBefore KatrinaAfter Katrina US GDP Growth4.1%3.6%3.5%3.9% CPI2.53.22.62.5

3. Katrina Economic Impacts Transportation Impacts –Port of New Orleans is 2d largest in U.S. Serious damage to facilities –Major exports from New Orleans are wheat corn, soybeans. –Major imports are steel, coffee, bananas, natural rubber and plywood. –Alternative ports in southern US are already near capacity, but some destination shifting and alternative transportation is likely.

4. Katrina Economic Impacts Energy Impacts –Gulf Coast is major source of US crude and the site of major petroleum refineries. –The risks to refined products now appear more serious that to the supply of crude. That is, damage to refineries may be greater than to offshore rigs. –Further spike in retail gasoline prices possible, perhaps $3.00/gal or more. This is supply shock on top of demand shock in 2004-05 caused by strong worldwide economic conditions. –Return to current levels in first half of 2006 as the supply shock recedes. West Texas Intermediate ($/bl) 2005QIII and QIV2006QI and QII Before KatrinaAfter KatrinaBefore KatrinaAfter Katrina $56.5$68.5$52.0$58.6

5. Katrina Economic Impacts US Economic Policy –US Economy was in different phase of the business cycle after 9/11. Then we were in a recession phase, with the Federal Reserve attempting to lower interest rate. –We are now in a recovery phase with the Federal Reserve trying to (slowly) raise interest rates. Increased uncertainty about Katrina damage will make the Federal Reserves task more complicated. –Consensus is that there will be only one more 25 basic point increase in Federal Funds rate during 2005, perhaps in September. –Greenspan may take a wait and see attitude about the impacts of Katrina on US economy.

6. Katrina Economic Impacts Overall risks to US Economy –Katrina introduces mostly downside risks – greater probability that growth will be less than expected. –Energy markets are tight and the full extent of damages not yet known. Any other worldwide supply disruption could send prices even higher. –Consumers and businesses could react negatively to price increases and cut spending – leading to unexpected aggregate demand decrease.

7. Katrina Impacts on Montana

8. Montanas Economic Base Nonresident Travel Wood Products Agriculture Mining Federal Govt (Incl. Military) 71%

9. Katrina Impacts on Montana Agriculture –Montana primarily produces cattle (domestic) and wheat (export). Almost all Montana wheat exported through Ports of Portland and Clarkston (WA). –Higher energy costs could affect farms production costs, but most of the impacts will be in 2006. –Montanans do consume bananas and drink coffee.

10. Katrina Impacts on Montana Mining –There is already oil boom in eastern Montana, which is supply constrained. Oil prices are now greater than local extraction costs (approx. $27/brl). Further oil price peaks unlikely to unblock supply constraints. –Any short-run peak in commodity prices (zinc, etc) unlikely to significantly increase Montana production.

11. Katrina Impacts on Montana Wood products and manufacturing –Higher energy prices will increase costs. ASMI in Butte. –Slower than expected interest rate hikes may keep construction booming longer. –Reconstruction activities may buoy lumber and plywood prices. –Gulf Coast is major wood and paper producing region. Net impact on these producers not yet known.

12. Katrina Impacts on Montana Nonresident Travel –Montanas peak travel season already passed. (just like 9/11) –Higher energy prices will have uncertain impact. They will negatively impact those coming from far away, but encourage regional tourist to stay nearby.

13. Katrina Impacts on Montana Summary –No reason (yet) to change revised forecast. Percent Montana Nonfarm Labor Income (Percent Change) ActualProjected 2.6 4.1 3.8 2.6 2.9 2.8 3.2 3.4 3.2

14. Katrina Impacts on Montana Risks to Montanas Economy –Diversion of federal funds to Gulf Coast –Overall national slowdown due to potential consumer and business spending cutbacks.

15. Questions? Thank you. Bureau of Business and Economic Research The University of Montana - Missoula