Wounded N.O. economy remains in coma
Experts say it's still too early for full prognosis
Friday, August 25, 2006
By Rebecca Mowbray
Despite the sounds of hammers, drills and saws in neighborhoods throughout the metro area, economists and construction experts say it's too early to view the economy as recovering and agree that the much-anticipated construction boom hasn't begun.
When Hurricane Katrina slammed New Orleans and the floodwalls toppled, the one-two punch wiped out an economy that had been wobbly at best since the oil boom of the 1970s and hastened further decline in a city that had been losing population since the 1960s.
"It's in shambles. There's no way to sugarcoat it," said Ryan Sweet, associate economist at Moody's Economy.com. "This is the first time in U.S. history where a city has sat dormant for almost a year. New Orleans has a long, long way to come back."
That the kind of economic boom that usually follows a disaster has yet to happen in New Orleans is a disappointment economists blame on two factors: lack of clear information and guidance from government, and the snail's pace of federal appropriations promised to homeowners seeking to rebuild or relocate.
The tardiness of the recovery makes it too early to tell much about what the New Orleans economy will look like when -- and if -- it emerges from its coma.
"Before you can have an economy, you need to have a functioning government with delivery of basic services to make sure that people have a basic level of confidence in the economy," said Amy Liu, deputy director of the Brookings Institution's Metropolitan Policy Program and lead researcher on the Katrina Index project.
Liu is not talking just about the electrical grid and debris removal. The infrastructures still crippled by Katrina cover a spectrum from courts and firefighting to sewerage and water lines.
"There are certain things that the government is really responsible for, that taxpayers expect," Liu said. "If they don't have it, they choose with their feet. People's tolerance only lasts so long."
Experts say if those projects are tackled swiftly enough, people and businesses will return, the economy will be resurrected, and an estimated $60 billion in direct grants, insurance settlements, and private and public investment will help reshape the city.
"We can't just be what we were. We need to take this opportunity to look at ourselves and our relative strengths," said Janet Speyrer, an economics professor at the University of New Orleans and director of the Division of Business and Economic Research. "The question is: What is it that we do here that is unique and can be exported to the rest of the nation?"
Set back 'generations'
Just how far did Katrina set New Orleans back?
The city is at roughly 1880 population levels, and the metropolitan area has about the same number of jobs it had more than a quarter-century ago.
"Hurricane Katrina, in a matter of days, wiped out generations of investment and planning. It cannot be rebuilt in a day, or in a year," Liu said. "In general, I will tell you, it is way too soon. I think the economy is still in a holding pattern and trying to recover."
Between August and September of last year, the New Orleans metro area lost 34 percent of its jobs, reducing total employment from 610,200 to 405,500, according to the Bureau of Labor Statistics. That's about the same number of jobs the area had in 1973, when Richard Nixon was president, disco was king and the OPEC oil cartel was putting the screws to the U.S. economy.
By June, the metro area had regained only 29,700 of those jobs, nudging total employment up to 435,200. The region is still down 175,000 jobs, or 28.7 percent of its pre-storm positions.
Jobs are one measure of economic vigor. Population is another.
Katrina basically emptied the city of its 454,863 residents. How many have come back is an open question. During the winter, researchers with the Rand Corp. think tank predicted that the city would have 198,000 residents by September. Using different methods, a Department of Health and Hospitals survey says between 180,000 and 210,000 people had returned by January; results of a follow-up study are expected in September. A California company puts the population of New Orleans at 214,486, while demographer Greg Rigamer estimates the city's population at 235,000. Split the differences among estimates, and the city's population can be called comparable to what it was in 1880, when 216,090 residents lived in roughly the same footprint that's reinhabited today.
Mayor Ray Nagin has talked expansively of the city's population rebounding and then exceeding its previous peak of 630,000. Sometimes he projects a city of 800,000 people.
Moody's Economy.com says no way.
"We don't have total employment or population ever returning to pre-Katrina levels. New Orleans is going to emerge as a smaller, more diverse economy," Sweet said.
Mike Chriszt, director of regional analysis at the Federal Reserve Bank in Atlanta, said he's not surprised about the deep wounds in the local economy and slow gains in job recovery.
The recovery hinges on housing. In the coming months, Chriszt says, he'll be watching for changes in school enrollment and the impact of the Road Home grant money as he monitors recovery in New Orleans.
"When I look at the number of people that evacuated, and the housing situation, it's not surprising," Chriszt said. "Until the housing situation is settled, people aren't going to return."
No construction boom yet
Despite visible construction activity throughout the area and the ambitious plans of Lowe's and Home Depot to expand the number of home-improvement outlets in the area, economists and construction experts alike think the much-heralded construction boom has yet to arrive.
"Frankly, we haven't seen this boom yet," said Derrell Cohoon, chief executive officer of Louisiana Associated General Contractors.
Delays in insurance settlements, distribution of flood maps, decisions on the levees and disbursement of the Road Home money mean that most people haven't started rebuilding yet.
Despite the need for housing, the number of permits issued for new home construction in the metro area for the first four months of 2006 was below that of the same period of 2005, according to a study by economist Loren Scott for the bank Capital One. And most of the permits for new homes were in St. Tammany and Jefferson parishes, not heavily damaged Orleans.
The Brookings Katrina Index notes that demolition in Orleans Parish has been slow: Only 185 homes had been razed by the end of June. But people are poised to rebuild: More than 38,594 residential electrical, mechanical and building permits -- nearly all for renovations -- had been taken out from the storm through August, a dramatic increase over the previous year.
Experts caution that this doesn't mean all houses with permits will be restored. In some cases, homeowners simply were lining up necessary paperwork ahead of deadlines after which houses would need to be raised in accordance with FEMA flood-elevation maps. Whether they proceed to act on those permits remains to be seen.
Recent increases in the number of homes for sale -- even though many homes are sitting on the market -- are a sign that people are beginning to make decisions about their future, Brookings said.
The scope of the rebuilding boom is potentially huge: UNO estimates that there's about $60 billion of new money flowing into the New Orleans-area economy from flood, homeowners and business insurance, assistance from the Federal Emergency Management Agency, federal government grants and private investment for construction or property repair.
Most people think of homes when they think about the anticipated construction boom, but rebuilding the levees, roads, sewer and water systems and utility grids will be an enormous job.
Economists, construction experts and other Katrina watchers expect that the boom will start in the next few months or early next year as people receive grant money through the Road Home program and start making decisions about rebuilding.
"You're starting to eliminate some of that uncertainty with people being able to start making plans for the future," said Chriszt of the Federal Reserve. Of course, there are caveats: Another terrible hurricane might call everything into question. And the longer it takes for New Orleans to fix its infrastructure and come up with a coordinated rebuilding plan, the more unlikely developers are to break ground on new developments.
To put the scope of rebuilding in perspective, some 124,000 homes stand vacant because of hurricane damage, and thousands of others were partially damaged.
The Louisiana Home Builders Association says that in a normal year, Louisiana builds 15,000 to 18,000 new homes statewide. In a good year, some 7,000 of those homes would be in the New Orleans metropolitan area.
That means it would take the entire rebuilding capacity in the state seven years to rebuild the homes that were destroyed, and the local building industry 18 years, if all the vacant homes are to be replaced. And that doesn't include all of the infrastructure construction.
Randy Noel, Louisiana's representative to the National Association of Home Builders, said it could take even longer because of materials and labor shortages, and because many people will rebuild an existing shell of a home rather than work from the ground up.
Noel, head of LaPlace residential builder Reve Inc., said that even now, building a new home takes closer to six months than four because of all of the obstacles.
While the building boom is expected to begin soon, there's no consensus on how long it will last. Moody's Economy.com says three years. The Louisiana Associated General Contractors estimates seven to 12 years. And the University of New Orleans thinks it could sustain the economy for 15 years.
But there are real questions about how much of New Orleans' rebuilding boom actually will occur in New Orleans.
"The big question is: How much of that is staying in the New Orleans area, or how much are people taking their money and rebuilding somewhere else?" Speyrer said. "We're not going to have all that here."
UNO thinks that at least half of the $60 billion will stay local, because grants meted out by the Road Home program and tax incentives available through the federal Gulf Opportunity Zone program require local construction. Contractors are less optimistic.
With so much uncertainty in the local planning process and with the condition of New Orleans' infrastructure, Cohoon, of Louisiana Associated General Contractors, said that he's seeing developers get cold feet on New Orleans. "I'm seeing these same investors we used to talk with in New Orleans up here in Baton Rouge because they need to turn their money over," Cohoon said. "Investors want to see the plan. What is the city going to look like?"
Noel said the home builders association worries that it will be more of a remodeling boom than a new construction boom because of the many challenges facing the New Orleans area.
"I don't see a huge boom. What I'm seeing is that people are stopping projects, whether residential or multifamily, because of the insurance issues," Noel said. "There's so many reasons not to come, it's not going to take much to stop them. New construction is going to be a little slower coming out of the ground."
Liu said that's why leadership from the mayor's office on a coordinated neighborhood plan and details on when and how the infrastructure problems will be addressed is essential to the rebuilding.
"I think the fact that there hasn't been that kind of honest discussion and vision has left so many people in the dark. The absence of information and the absence of a sense of direction creates uncertainty. That may accelerate the decision for evacuees to stay where they are," Liu said.
Bolstering the idea that the construction boom has yet to arrive, employment figures show that construction is down by 10,800 jobs since the storm and has shrunk as a proportion of the area's jobs from 4.9 percent to 4.4 percent.
But experts think the numbers may be misleading. Construction employment certainly has skyrocketed since the storm, but workers aren't captured in the statistics because of the way the numbers are tallied.
The only people who are counted in the Bureau of Labor Statistics employment figures are those who work for firms based in the metro area. This means that workers for a Texas, or even a Shreveport, contractor with work in New Orleans don't show up in the official numbers. By the same token, the many people who picked up a crowbar to gut houses or who became instant wallboard hangers when they lost other jobs aren't counted because they're sole proprietors or subcontractors. Illegal immigrant construction workers also don't show up.
"There really is a lot of construction going on, and we're not capturing it in these construction numbers," UNO's Speyrer said.
While construction will carry the economy for some time to come, other signature industries for New Orleans will be fighting to regain lost ground. It's essential that they succeed, economists say, because a construction-based economy is only temporary after a storm.
Since Katrina, employment in almost every sector has declined, Chriszt said.
Tourism, health care and office jobs all have decreased in large numbers. So have sectors that correspond to population, such as education, retail and groceries.
The medical sector could face one of the toughest roads. Before Katrina, the sector had been Greater New Orleans Inc.'s top prospect for economic development in the region.
Today, 17 of the metro area's 50 pre-storm hospitals remain closed, including six acute-care hospitals in New Orleans and one acute-care hospital in St. Bernard Parish, according to the Louisiana Hospital Association.
In the tourism industry, hotels are coming back on line, but weakened air service makes it harder to fill them.
Some 28,000 local hotel rooms have reopened, about three-quarters of the 38,000 pre-storm rooms in Orleans and Jefferson parishes, with some major properties such as the Ritz-Carlton hotel complex and the Fairmont New Orleans opening later this year.
But the daily capacity of airplanes flying in and out of Louis Armstrong New Orleans International Airport has shrunk to 12,000 passengers, down from 21,000 before the storm. Many airlines have indicated they plan to restore discontinued flights as passenger demand grows.
The brightest prospect on tourism's horizon is the return of some major conventions this fall. Among them are the Society of Exploration Geophysicists, with 8,500 attendees; the American College of Emergency Physicians, with 6,500 people; the American Society for Reproductive Medicine, with 6,000 members; the Societies for Coatings Technology's 6,500 people; and the National Association of Realtors, with its 25,000 participants.
All told, the Ernest N. Morial Convention Center will host about the same amount of business this fall as it did in the fall of 2004. In October and November 2004, the center hosted 12 events with 88,600 people; this fall, it will host 10 events with 84,200 people, a hearty rebound after losing last fall's convention season in its entirety.
Oil and gas sector gains
In the oil and gas sector, some 113 platforms in the Gulf of Mexico were destroyed and 457 pipelines were damaged by Katrina and Rita, according to the federal Minerals Management Service. But as of mid-June, 88 percent of oil production and 91 percent of natural gas production had returned to the Gulf.
Other good news is that the area dodged the bullet on Chevron. The company, which employs 500, is leaving the Poydras Street corridor, but not to follow other oil giants to Houston. Instead, Chevron is relocating to the north shore, keeping its well-paying jobs in the metro area.
Oil and gas employment, a rare bright spot after Katrina, has actually gained 1,800 jobs since the storm, an upturn of 21 percent. But that probably has more to do with high energy prices making it worthwhile for companies to step up production than anything particular to New Orleans, and oil and gas provides only a small proportion of the economy's jobs, about 2.4 percent, a 1 percent improvement on its pre-storm proportion in the smaller economy. Jobs in the transportation and warehousing sector -- essentially, the Port of New Orleans -- also have been fairly resilient. The number of positions has dipped, but not as dramatically as in areas such as health care and tourism.
At the port, the number of ship calls is back to normal and general cargo tonnage is at 94 percent of pre-Katrina levels. This fall, New Orleans will regain three of its four home-ported cruise ships or their equivalents, and the fourth will return in September 2007. At this point, the port's biggest priority is working to relocate businesses that were located along the Mississippi River-Gulf Outlet, which was responsible for about 25 percent of the port's business before the storm.
Despite the pink slips that eliminated some 3,000 jobs at New Orleans City Hall, local government has not shrunk at the same rapid clip as private sector employment. In August 2005, local government jobs made up 10 percent of total employment. Even after elimination of 6,900 positions post-Katrina, they now make up 12.5 percent of the area's jobs.
To what degree the economy will recover remains an open question, but UNO says that from here on out, the trajectory of recovery will be steep. While the moribund New Orleans economy grew at a rate of about 0.5 percent a year before the storm, Speyrer said, it's now growing at that rate each month.
A new New Orleans
New Orleans needs to leverage its traditional strengths to rebuild, but it will have to look for something new to revive its economy.
Traditional industries such as the port and the oil and gas sector have been in decline for a long time in New Orleans, and the convention business has been facing brutal competition from other cities that are slashing rates as a way to lure business to a rash of new exhibition halls.
New Orleans will have to augment these traditional strengths with something new, an industry that can thrive despite what's expected to be a more expensive housing market and the higher labor costs that it likely will entail.
But with crisis comes the opportunity to address long-standing problems, chief among them the city's entrenched poverty and dysfunctional schools. Just as the oil bust gave the city its modern tourism and casino industries, Katrina likely will send New Orleans in a new direction, too.
"It's up to the community to decide what we want to do," Speyrer said. "We need to use this money not only to rebuild, but to build for the future."
Liu thinks that New Orleans would be wise to invest in its culture and ethnic diversity. The city's creative talents are what makes New Orleans different from any other place, and are perhaps the best argument for the huge public investment required to shore up the city's shattered flood defenses.
Recognition of this strength, coupled with a tax incentive program, spawned an enviable movie industry in recent years, and those same talents that made the film industry roll could yield other new business potential. The city's large university base, particularly its historically black colleges, could be a magnet for development and attracting young people.
"You've got to focus on your strengths. I do think one of the strengths is in the knowledge economy," Liu said. "It may be that young people are willing to make a commitment to a dynamic, growing town."
But how it all shakes out, no one knows. "What's the New Orleans economy going to look like in 10 years? I don't know," Chriszt said. "So much depends on how these programs pan out, if people come back, if businesses come back. It's just so hard to know right now."
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Rebecca Mowbray can be reached at email@example.com or (504) 826-3417.