Building performance, Hurricane Andrew in Florida : observations, recommendations and technical guidance

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Building performance, Hurricane Andrew in Florida : observations, recommendations and technical guidance
Federal Emergency Management Agency
Federal Insurance Administration
United States Federal Emergency Management Agency
United States Federal Insurance Administration
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Buildings -- Florida -- Performance
Buildings -- Florida
Buildings -- Performance -- Florida
Construction industry -- Florida -- Observations
Hurricane Andrew, 1992
Hurricane damage
Miami-Dade County (Fla.)
Hurricane damage -- Florida
Standards, Engineering
Standards, Engineering -- Florida
Wind pressure
Winds -- Speed
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South Florida Collection, Government Documents, Green Library, Florida International University
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1 U.S. Department of Commerce, Survey of Current Business Oct. 1992, pp.2-4.Congressional Research Service The Library of Congress CRS Report for CongressReceived through the CRS Web Order Code RS22260 September 13, 2005The Macroeconomic Effects of Hurricane KatrinaBrian W. Cashell Marc Labonte Government and Finance DivisionSummaryHurricane Katrina will have substantial and long-term effects on the economies of southern Louisiana and Mississippi. But, give n that those two states account for just 2% of total U.S. gross domestic product, the effects on the nationa l economy will be much less dramatic than the effects on the regi on. Since the storm, a number of economic forecasters have adjusted their predictions to reflect its effects. Most indicate that, as a result of the storm, nationa l economic growth is expected to be 0.5%-1.0% slower than in the second half of 2005. However, as economic activity recovers in the affected region, and rebuilding begins, growth in the first half of 2006 is now expected to be more rapid than was previously forecast. This report will be updated as reliable data become available. There can be no doubt that Hurricane Katrina wa s a tragic and historic event that will have substantial and long-t erm effects on the economies of southern Louisiana and Mississippi. From a national perspective, th at region of the country accounts for only a fraction of U.S. economic activity. In 2004, Louisiana and Mississippi accounted for just 2% of national gross domestic product (GDP). In 2003, the New Orleans-MetairieKenner metropolitan area accounted for just 0.4% of total nationa l personal income. Given the relatively small percentage that the affected area contributes directly to national output, what are the prospect s for a noticeable slowdown in national economic growth?Historical Perspective In 1992, the United States was hit by tw o major storms: Hurricane Andrew, which hit Florida and Louisiana in late August, and Hurricane Iniki, which hit Hawaii in midSeptember. Both storms caused significan t destruction of comme rcial and residential structures. The Bureau of Economic Analysis (BEA) estimated that the storms directly reduced the fixed capital stock by $55.1 billion, or over $60 billion in 2005 dollars.1


CRS-2 2 National Association of Home Builders news release, Sept. 2, 2005, available at their website, at [].3 Jason Bram, James Orr, and Carol Rappaport, “Measuring the Effects of the September 11thAttacks on New York City,” Federal Reserve Bank of New York, Economic Policy Review vol. 8, no. 2, Nov. 2002. However, more recent data suggests that the effect was smaller than originally estimated. See Jason Bram, “New Yo rk City’s Economy Before and After September 11th,” Federal Reserve Bank of New York, Current Issues in Economics and Finance vol. 9, no. 2, Feb. 2003.Gross domestic product, the standard measure of economic output, measures new production; destruction of the existing capital stock is not part of the GDP measurement. (However, net domestic produc t, which is GDP less capita l depreciation, was reduced.) Of course, the loss of capita l and labor reduces the nati on’s ability to produce new goods and services, but BEA cannot is olate those effects in the a ggregate data. For example, BEA cannot quantify how much of a reducti on in tourism services is caused by a hurricane compared to other factors. What the data do show is that the growth rate of national GDP actually increased from 3.9% in the second quarter of 1992 to 4.0% in the third quarter. By contrast, the growth rate of net domestic produc t fell from 4.2% in the second quarter to -1.1% in the third quarter. Nor did the hurricanes cause a fall in gross local output: Florida grew at 3.3% — the same rate as the nation — and Hawaii grew at 2.1%, in 1992. Total employment in Florida grew at a 1.2% rate in 1992, compared to 0.3% nationally. Most reports suggest that the costs of Hurricane Katrina will surpass those of Iniki and Andrew. For example, the Nationa l Association of Home Builders (NAHB) estimated that the number of housing units destroyed by Hurricane Andrew was over 28,000. As a result of damage from Hurricane Katrina, the NAHB expects that a large share of the more than 200,000 homes in New Orleans will be found to have been damaged beyond repair, in addition to storm losses el sewhere not yet estimated.2The economic effects of Hurricane Katrina ha ve also been compared to the terrorist attacks of September 11. The attacks cam e during the 2001 recession, which began in March 2001, and ended in Nove mber 2001. In the third quarter of 2001, national GDP declined by 1.4%. It is likely that third qua rter growth would still have been negative had the attacks not occurred. In New York st ate, output rose by 1.8% in 2001, fell by 0.8% in 2002, and then returned to a healthy gr owth rate beginning in 2003. The Federal Reserve Bank of New York estimated that September 11th caused a loss of 49,000-71,000 jobs in New York City in the worst month, February 2002.3Effects on National Economic GrowthIt is important to keep in mind that the effect on national output from the area affected by Katrina is largely a one-time event. It represents a drop in the normal level of output due to lost labor hours and capital. Most of that immediate effect will be reflected in reported GDP growth for the third quarter. Until output returns to normal levels national output may be depressed, but the growth rate of the economy is likely to recover quickly.


CRS-3 4 Global Insight, “U.S. Economy: Current Situati on: Forecast Flash,” posted on the Global Insight website Sept. 8, 2005. Global Insight, “Katrina ’s Impact on the New Orleans Economy,” posted on the Global Insight website Sept. 7, 2005. 5 Both from Forbes, “Hurricane’s Big Bucks,” posted at [http:\\] on Sept. 1, 2005. 6 Congressional Budget Office, memorandum to Senator William H. Frist, M.D., Sept. 6, 2005.In fact, increased spending for immediate storm relief will offset some of the losses due to the storm. Although damage to th e capital stock does not reduce measured GDP, rebuilding increases it. Some of the regions that take in victims will see their growth rates rise as the victims receive government re lief spending and, in some cases, obtain employment in their temporary city. Moreover, there is likely to be an increase in construction spending in the quarters and years to come in the affected area. The effects of that construction boom will be substantial locally, but m odest at the national level. Even if estimates of over 100,000 homes destro yed prove correct, their replacement will add only marginally to cons truction totals nationwide. In 2004, the Census Bureau reported nearly 2 million to tal new housing starts. Even if the storm had resulted in the loss of all output contributed by Louisiana and Mississippi, the direct effect on national GDP would only be a drop of 2%. Since some economic activity continues in both states, the loss will be less than that. Those parishes in Louisiana and the counties in Mississippi and Alabama that were declared presidential disaster areas accounted for 1.3% of total nati onal personal income in 2003 Prior to the storm, the U.S. economy was growing well in excess of 2%. The a nnual rate of growth in real GDP was 4.2% in 2004. For the firs t two quarters of 2005, the growth rates were 3.8% a nd 3.3% respectively. Thus lost output due to the storm seems unlikely to be sufficient to result in recessi on, or negative economic growth. Growth Forecasts. Some forecasters have adju sted their economic projections to include the potential effects of Katrina. Global Insight has lowered its forecast for economic growth in the second half of 2005 by 0.7 percentage point. Anticipating falling energy prices and a pickup in reconstructi on, Global Insight raised its projection for growth in the first half of 2006 by 0.8 per centage point. Measured year over year the changes appear more modest. The forecast for 2005 was reduced by 0.2 percentage point, and the forecast for 2006 was increased by the same amount.4On August 18, 2005, Macroeconomic Advisers released a forecast of 4.6% growth in the third quarter and 3.6% in the fourth quarter. On September 6, 2005, they revised those numbers down to 3.2% and 3.3%. After th e storm, the Bank of America is reported to have lowered its GDP growth forecast fo r the fourth quarter from 3.7% to 3.0%. Merrill Lynch economists were reported to have estimated that the combination of the storm and higher energy prices could reduce output by a combined $70 billion, or 0.6% of GDP.5 The Congressional Budget Office (CBO) estimates that the overall reduction in economic growth due to Katrina in the sec ond half of 2005 is likely to be somewhere between one-half and one percentage point, and will be even less when considered on a year-over-year basis. CBO also estimated the Katrina could reduce employment through the end of the year by as much as 400,000.6


CRS-4 7 For the current status, see En ergy Information Administration, Special Report — Hurricane Katrina’s Impact on U.S. Energy at [, frequently] updated. For more detailed informati on, see CRS Report RS22233, Oil and Gas: Supply Issues After Katrina by Robert Bamberger and Lawrence Kumins.Just as the loss of output due to Katr ina is likely to reduce economic growth somewhat in the second half of 2005, the resu mption of economic activity in the affected areas will raise growth, perhaps as soon as early 2006. Both that and the additional spending associated with the rebuilding are lik ely to be a boost to economic growth in the first half of 2006. In the same two for ecasts cited above, M acroeconomic Advisers adjusted their outlook for economic growth in the first two quarters of 2006 from 3.2% and 3.2% before Katrina, to 4.4% and 3.8% afterwards. For the hurricane to have longer lasting negative economic effect s, it would have to affect the broader national economy. This could occur if the hurricane led to wide spread disruption of specific sectors of the economy.Sectoral IssuesThus far, this report has examined the direct effects of Hurricane Katrina on the local gulf economies as a share of the national ec onomy. Next, the report will examine whether the Hurricane will have any indirect effects on the rest of the nation that was not hit by the hurricane. Energy. The gulf region is an important produ cer and distributor of oil and natural gas for the nation as a whole. It produces 6.5% of domestic crude oil consumption and 16% of natural gas consumption. Oil refineries in the gulf area were also shut down by Hurricane Katrina; initially, about 2 million barrels per day of refining capacity was lost. The Louisiana Offshore Oil Port receives crude oil imports equal to 5% of consumption, and major pipelines that serve the East Coast, South, and Midwest originate in the gulf. The long-term effect of Katrina on energy prices depends how quickly the production facilities, refineries, ports, and pipelines can be repaired and brought back on line.7 Why would higher energy prices be a cau se for broader economic concern? Eight of the nine post-war recessions were accompanied by sharp increases in the price of oil. The last four recessions followed this pattern: the 1973-1975 recession followed the oil embargo; the double dip recession of 19801982 followed the second oil shock, which was caused by the Iranian revolution and Iran-Iraq War; the 1990-1991 recession followed the oil price spike induced by the Gulf Wa r; and the 2001 recession followed a sharp rise in oil prices from 1999 to 2000. Energy prices are important to the br oader economy because energy is a major component in the production process and a major consumption good for households. Economic theory suggests that oil shocks lead to higher inflation, a contraction in output, and higher unemployment in the short run. It is the rise in energy prices, rather than “high” energy prices, that causes these macroeconomic problems. Effective policy responses are difficult because expansionary monetary policy (lower interest rates) or fiscal policy (increased budget deficit) would exacerbate the inflationary pressures caused by the oil shock, while contractionary polic y would exacerbate the contraction in output.


CRS-5 8 For more information, see CRS Report RL31608, The Effects of Oil Shocks on the Economy: A Review of the Empirical Evidence by Marc Labonte.9 Statistics from American Association of Port Authorities, Press Room [].10 Up-to-date status of ports can be found at American Association of Port Authorities, Press Room [].Some studies found that the cumulative effect of a 10% increase in oil prices during a one-quarter (3-month) period would re duce economic growth by 0.7-1.4 percentage points over the next year. This means that a small, transient price increase would reduce growth modestly, but a long, sharp price increase could push the economy into recession.8Empirical research and macroeconomic models of the effect of oil price increases on economic growth and inflation are typically m easured in terms of the price of crude oil, not gasoline prices. Initially, the effect of the hurricane on crude oil prices has been moderate, while the effect on gasoline pri ces has been significant. Thus, the macroeconomic mode ls may underpredict the effect of higher prices on the economy. However, the disparity between the increase in gasoline prices and crude oil prices probably reflects the loss of refinery capacity as a result of the hurricane. This suggests that once refinery capacity is brought back on line, gasoline prices should come back in line with crude oil prices. Trade. Another channel through which th e hurricane could affect the broader national economy is through its effects on international trad e. New Orleans and other Gulf ports are major loading points for imports and exports. Imports that passed through Gulf ports in 2003 equaled $100 billion, about one sixth of a ll imports passing through U.S. ports. By tonnage, Louisiana contains fi ve of the 12 largest U.S. ports, including the first (South Louisiana) and fift h (New Orleans) largest, and Mobile, AL is the fourteenth largest.9Disruptions to trade may be mostly short-lived. The ports are not expected to be closed for an extended period of time. Ports in Baton Rouge, South Louisiana, and Mobile were open shortly after the storm. The port of New Orl eans was re-opened to military and relief vessels on September 7. The Mississippi River was partially reopened to traffic on September 5. Most trade can be diverted to other ports relatively easily. A notable exception is certain agricultural commodities, including half of U.S. grain exports, that are shipped from the Midwest down the Mississippi River on barges to Louisiana ports, and then shipped abroad.10Trade impacts the GDP through net expor ts. From an accounting perspective, exports add to GDP and imports subtract from GDP. Thus, if both exports and imports fell in equal proportion as a result of the hu rricane, GDP would be unchanged. Only if net exports fall (e.g., because of greater oil imports or reduced agricultural exports) would GDP fall as a result of the hu rricaneÂ’s disruptions of trade.


CRS-6 11 See CRS Report RL30354, Monetary Policy: Current Policy and Conditions by Marc Labonte and Gail Makinen.12 See CRS Report RL31235, Economics of the Budget Deficit by Brian Cashell.Policy ResponsePolicymakers have two tools at their disposal to offset the effects of the hurricane on aggregate spending in the economy: fiscal and monetary policy. The Federal Reserve can use monetary policy to stimulate spending by lowering the overnight interest rate.11This stimulates interest-sensitive spending on capital investment goods, residential investment, consumer durables, and net exports. Fiscal policy can be used to stimulate spending through an increase in the budget deficit.12 Deficit-financed spending stimulates aggregate spending because the spending is financed through borrowing. Likewise, deficit-financed tax cuts stimulate private spending by the recipient that is financed through borrowing. Economic theory holds that deficit-financed spending is more stimulative than deficit-financed tax cuts because some of the tax cut would be saved rather than spent. Any stimulus to spending is only temporary; in the long run, spending cannot grow faster than the growth in the productive capacity of the economy. The emergency supplemental appropriation en acted in response to the hurricane will act as a natural stimulus even though that is not its intention. A $10.5 billion supplemental was enacted on September 2 (P.L.109-61), and a $51.8 billion supplemental was enacted on September 8 (P.L.109-62). Co mbined, these supplementals would equal about 0.5% of GDP; however, further supplemen tals may be enacted in the future. If the negative economic effects of the hurricane are as short-lived as predicted, additional stimulus might take effect after the fact. While changes in interest rates can be implemented rapidly, the effect on the ec onomy is delayed. Fiscal policy changes also face an implementation lag. For exampl e, a stimulus bill was proposed immediately following the September 11 attacks, but was not enacted until March 9, 2002 (P.L.107147). Policy lags are less of an issu e for emergency supplemental spending. If higher oil prices persist as a result of the hurricane, then inflation over the next few quarters is likely to be higher than the Fed expected when it set its interest rate path prior to the storm. While inflation is unlikely to be intolerably high as a result of higher oil prices, it may top 3%, which seems to have been the upper-bound of the FedÂ’s comfort level in recent years. A drawback to stimula tive policy is that it would be likely to push inflation even higher. If economic forecasters are correct th at the hurricane will have a limited and temporary effect on economic growth, then fiscal or monetary stimulus would be unnecessary to keep the economy on a growth path near full employment. After being revised downward to take the hurricane into account, most for ecasts are still near 3%, which is close to the economyÂ’s historical average. If aggr egate spending is stimulated when the economy is at full employment, th e results are likely to be inflationary.