After The Hurricane

by Rikki Kirzner, Partner

Our thoughts and prayers go out to those people and their families who were adversely affected by the trail of death and destruction wreaked by Hurricane Katrina and the less destructive Hurricane Rita that followed in its wake.

The Economic Impact

Certainly, Katrina will negatively impact the US economy for many months to come. The loss of a major Gulf Coast seaport where an estimated billion dollars a year in agricultural commodities including, coffee, grains, corn, etc. as well as oil and gas supplies will ripple through all industries, including high tech. Prices for all these items will rise in the short term due to the shortages. As new shipments of these items are diverted to other serviceable ports, prices will continue to climb higher, because of higher transport costs.

Extensive damage to Louisiana’s refineries and to the oil and natural gas supplies in the Gulf of Mexico drove gas prices well over $3.00 a gallon almost overnight. Gasoline prices are forecast to remain high for the medium term and thus curtail consumer spending in all sectors.

This bad news comes on the heels of reports that employment and manufacturing orders may be weakening. Overall incomes experienced a slight decline in many states according to the latest figures of the US Census Bureau’s annual report card. Median pretax income was at its lowest point since 1997 after inflation. The Commerce Department reported that factory orders fell by just under 2% in July. These figures also show that lower-income employees dependent on weekly paychecks continue to see an erosion in spending ability. While the US economy was growing, the actual growth in US employment has been steadily shifting from high paid occupations to low pay, minimum wage jobs. All expectations now are that rising energy costs will continue to dampen the economic momentum of recent months and most economists predict a decline of about 2% in GDP for the next two quarters.

In previous years the short-term devastation of a hurricane resulted in strong GDP growth when reconstruction and the demand for durable goods began. However, any prolonged disruption in the ability of Gulf oil companies to come back on line could conceivably raise prices of goods high enough to offset any gains due to the demands of rebuilding homes and businesses wiped out by Katrina. Even if most of the largest refineries can ramp up quickly, Katrina damaged the only port on the Gulf Coast large enough to handle the majority of oil tanker traffic which impacts oil deliveries (and prices) until repairs can be made to the port.

The economic effect of rising oil prices puts more than the US economy at risk. As US consumer spending is curtailed, nations such as those in Asia that depend on American consumers will see a decline in demand for their products. Rising oil prices are a natural result of not enough supply and too much demand. Until the US oil production is back to full capacity, Americans will have to shop abroad to satiate their large fuel appetites potentially driving up oil prices still further. Europe’s own recovery could also be curtailed by the steady increase in gas and heating oil prices as European consumers tighten their own belts. Since Asia also exports to Europe, this could further weaken Asia’s export markets and its own economy.

Best Case – Worst Case

In the best-case scenario, the economy will take a hit for only a few months impacting growth in the third and possibly fourth quarter of this year. Assuming oil refineries can come back on line within the next 3 to 4 months, oil prices could drop back down below the three dollar mark by first quarter, 2006. Demand for new housing to accommodate displaced residents as well as demand for durable goods, clothes and other necessities lost in the hurricane could spur strong economic growth in those areas where the displaced population has resettled.

In a worst case scenario, where gas and heating prices remain high due to oil shortages, and where many of the jobs lost due to destroyed businesses are not replaced, consumer spending could continue to drop possibly dragging the GDP down and effectively wiping out all economic gains made in the previous year.

The Tech Sector

So what will the effect of this be on the high tech sector? In the third or fourth quarter, reduced consumer spending will take its toll in slightly reduced demand for PCs, hardware, software, and infrastructure upgrades. Companies with heavy technology investments in the ravaged areas will have to write off their losses and find ways to offset the loss of service and maintenance revenues. In all probability, high tech workers will continue to be asked to do more and work more hours as job hiring in the high tech sector is curtailed to contain expenses and try to maintain profits. However, the opportunity for high tech solutions should spur demand for better, more efficient, and more reliable communications and disaster recovery solutions in light of the devastation wrought by Katrina. And the high tech industry will respond accordingly.

The reason for this can be seen on any news channel or in the media images of the extensive destruction of property and resultant disruption of people’s lives. Once-sophisticated cities and communities in Louisiana, Mississippi, and Alabama have been transformed into isolated, third world societies by an act of nature. Few expected that we would ever witness the breakdown of an advanced industrial society inside the United States. No one ever anticipated or prepared for the fact that people living in this country would be cut off completely from the outside world. In short, Katrina rendered the Gulf Coast cities as helpless as those third world Asia Pacific communities devastated by the tsunami.

Opportunity abounds for the telecommunications industry and high tech community to step in and fill the void left by the aftermath of Mother Nature. We can expect the government and private sector to address the inadequacy of our communications systems with more funding and incentives to the high tech industry to create more effective devices, networks, and mobile solutions. We can also expect most major infrastructure industries to recognize and want to take advantage of creating the systems, technical infrastructure, and solutions that will ensure we are never this vulnerable again.

Like nature’s abhorrence of a vacuum, innovation will thrive when there is ample opportunity for new business opportunities. We know how vulnerable we are when disaster strikes. No one doubts that disaster will strike again. The number of powerful potentially destructive storms has been increasing over the past 15 years. Thanks to 911 we also live in fear of terrorism decimating another community or major city. These factors set the stage for a new era of technology, communications, and infrastructure solutions to be funded and to arise. In essence, in the ashes of vast destruction are the seeds of opportunity for technology companies?and the strong growth potential throughout the coming years.

After The Hurricane

After The Hurricane

After The Hurricane

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