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by Scott Bennett    Sat, Oct 15, 2005, 11:27 am

The Economic Landscape Post Katrina

Carl Pellegrini
The U. S. economy is currently experiencing a contraction in production that is due to a disruption of Supply. Economists always analyze fluctuations of Demand and assume that Supply is not a constraint. The hurricanes and the level of energy prices have acted to reduce available and effective Supply.

The airlines have announced cutbacks of flights due to fuel costs; individuals are cutting back on driving; the list goes on and on. This behavior means less eating out and less income for travel related business. The hurricanes destroyed the homes of workers along the coast; these workers need a place to live so to be able to work for the firms that sell outside the local trading area. Temporary housing is being obtained for these workers, but this process takes time, more time than going through the fast food drive in lane at McDonalds.

The current level of energy prices has severely disrupted the economics of many industries, fertilizer and transportation being the most obvious. Firms that did not have long term supply contracts for their energy supply must obtain their raw materials in the spot market. If contracts for delivery of product had already been entered into, embodying assumptions of lower cost, losses are incurred.

Customers have budgets, both consumer and business; if substitutes are not available for these impacted higher priced products, then consumption is reduced or funds are borrowed in order to maintain purchases until other plans are decided upon. Just look at yourself or ask your circle of friends how they are responding. Understanding human behavior is not rocket science; common sense is a reliable guide.

The financial consequences of this economic disruption are expected to feed upon the real world adjustments. Bad debts must be written off. All too many auto and home loans will not be repaid. The behavior of short term and long term lenders will determine the second installment of this shock to the system. Will they assume more, less, or the same amount of risk?

To the extent that people do not return to the New Orleans area, business decisions and new loans affecting that area will be slow being made. The desire to fund hurricane relief by cutting growth in existing Federal government programs means that decisions will be slow being made and a much wider circle of impacted firms is created. If your firm was assuming a given level of revenue related to growth of government spending, and now that growth is now in jeopardy, how do you respond?

Again, understanding human behavior is not rocket science; common sense is a reliable guide

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