More than two weeks after the devastation wrought by Hurricane Katrina, much of the Los Angeles economy is holding up and even primed to benefit from the disaster, although higher prices for fuel and raw materials remain the wild cards.
“Overall, we’re expecting a muted effect,” said Joseph Magaddino, chairman of the economics department at California State University Long Beach. “The local economy is far better positioned to take this shock than it was after the 9/11 terrorist attacks.”
In particular, environmental, engineering and construction firms are likely to bid on reconstruction projects that emerge over the next several months or even years. In anticipation of this increased business, the stock prices of several local firms shot up in the aftermath of the hurricane and flooding.
Not surprisingly, the sectors most heavily impacted are those especially sensitive to higher fuel and raw materials costs such as trucking and construction. Also, some financial services businesses based in L.A., including insurance and mortgage companies, could be hit with losses stemming from the hurricane. But even here, the damage will not be long-term.
“The biggest negative for the L.A. region is likely to be inflation caused by the hurricane,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. “The risk here is that if inflation leads to a drop in consumer spending, we could see some slowing of growth locally.”
While the threat of sustained higher prices for fuel and some commodities could prompt further interest rate hikes from the Federal Reserve Board, few expect any sudden interest rate moves that could jolt the local economy, especially the frenzied housing market. Only the risk of a national recession being sparked by the hurricane which is now seen as remote could scramble things.
On the ground
Several locally based engineering and construction firms that had projects in the hurricane zone have been busy repairing damage and making sure their employees are safe.
Pasadena-based Parsons Corp. has at least four projects on the central Gulf Coast, including building a shipyard for Los Angeles-based Northrop Grumman Corp. at Pascagoula, Miss. and an expansion project at Louis Armstrong Airport in New Orleans. “All of our people have been accounted for,” said spokeswoman Virginia Baca.
“We’ve gone back and we’re doing emergency repairs, and we plan to be at it for a while,” Baca said. “We’re going back and cleaning up the mess that was made of our work.”
She noted one indication of the difficult working conditions: “One of our presidents sent down a box of satellite phones to the Northrop project because there are no phone lines or computers. It’s very hard to communicate.”
Rival Jacobs Engineering Group Inc. also has projects near the hurricane zone, as well as an office in Baton Rouge, La. The Pasadena-based engineering and construction giant has an environmental upgrade project at Motiva Enterprises LLC’s refinery in Convent, La., about 40 miles west of New Orleans. Further to the west, in Lake Charles, Jacobs is working on a coker drum replacement for Citgo Petroleum Corp.
Jacobs also has a five-year, $40 million contract with the U.S. Army Corps of Engineers for environmental work on corps projects in Texas, Oklahoma, Arkansas and Louisiana, though it was unclear whether Jacobs worked on the levees around New Orleans.
Jacobs spokesman Bob Hummel refused to comment on the status of any of the projects or personnel in the region, noting in a statement that “we’re focused on our people and our clients and anything else we can do to help out. It’s too early to know if there are any issues about rebuilding.”
Jacobs’ stock, which shot up 8 percent to $62.71 a share the day after the levees broke and flooded New Orleans, has stayed near its 52-week high, closing on Sept. 8 at $61.99.
Long Beach environmental firm Earth Tech, a division of Tyco International Ltd., maintains facilities for two clients on the Gulf Coast. They are a manufacturing plant for Dow Chemical Co. and a refining plant for Valero Energy Corp.
Following Katrina, Earth Tech found that both facilities were operational and its several dozen workers were safe. “We were fortunate we didn’t have more people on the ground outside of these two projects,” said Earth Tech spokesman Frank Pollare.
Pollare said Earth Tech will likely bid on environmental and cleanup projects in coming months. He noted that the company has longstanding contracts with the U.S. Environmental Protection Agency and the Federal Emergency Management Agency.
‘It’s crazy’
For now, some of the bigger hits will be felt by the insurance industry. Woodland Hills-based Zenith National Insurance Corp. said last week that third-quarter losses in its reinsurance unit will likely reach $21 million. The Woodland Hills-based property and casualty insurer, whose biggest business is workers’ compensation insurance, has decided to exit the reinsurance business to reduce the volatility of the company’s earnings.
Calabasas-based mortgage giant Countrywide Financial Corp. had about 500 employees in the Gulf Coast area, as well as at least 24 branches. Fifteen of those branches remained closed at least through the Labor Day weekend; the company said paychecks for its employees would continue to flow, despite the branch closures.
Last week, Countrywide set up a hotline to deal with an expected large volume of calls from homeowners in flooded areas concerned about mortgage payments. “Countrywide will work with every borrower who has lost his or her home,” Chairman and Chief Executive Angelo Mozilo said in a press release. Countrywide hasn’t said how much financial exposure it has to properties in the affected areas.
But it’s fuel costs that continue to generate the most concern.
“It’s crazy, they’re having a natural disaster but we have higher fuel prices,” said Stephanie Williams, a spokeswoman for the California Trucking Association. “Many truckers are going to go out of business, but we won’t know how many until we see who is no longer paying their dues.” (See related story, page 12.)
In an effort to contain runaway diesel costs, the state Board of Equalization last week waived the penalty for using off-the-road diesel on the highway, and the California Air Resources Board announced that it planned to temporarily allow consumers to use fuel that doesn’t meet its strict emissions standards. Both moves followed action by the EPA to prevent even further fuel supply shortages following the disaster.
But the state has not taken any steps to reduce the cost of natural gas, a significant portion of which has come through the Gulf region.
“If the natural gas pipelines don’t get back up to capacity in short order, we could see a dramatic run-up in natural gas prices similar to what we saw in 2001,” Magaddino said, referring to a short but acute natural gas shortage that more than doubled prices for about three months.
That price spike hit numerous sectors of the local economy, including apparel makers, restaurants, Laundromats and power plants. Natural gas and diesel supplies were already tight before the hurricane.
Passing on increases?
Besides fuel, steel prices could rise as much as 20 percent because of increased demand for the rebuilding effort. Costs for other building materials were also expected to rise by similar amounts.
“Right now, we’re not seeing any availability problems, but prices are definitely on an upward trend,” said James MacBeth, senior vice president of Reliance Steel & Aluminum Co. in Los Angeles.
MacBeth said the company was planning to pass on much of these cost increases to customers, including a fuel surcharge.
The building industry also expects to be hit. “After Hurricane Andrew, plywood costs doubled and lumber costs rose about 20 percent. I wouldn’t be surprised to see a similar situation here, especially given the amount of rebuilding we’re likely to see,” said Richard Lambros, chief executive of the Building Industry Association of California.
Lambros said he expects the costs of roofing materials, concrete and drywall to increase. Concrete could be especially hard hit, since New Orleans was a major import and export terminal. “Specialized terminals for the loading and offloading of cement and concrete can’t be built overnight,” he said.
The higher costs of building materials could force developers and agencies planning major projects to scale them back.
But one unlikely beneficiary could be L.A.’s tourism and visitor business.
With last week’s announcement from the New Orleans Convention and Visitors Bureau that all major conventions in the city are cancelled at least through March 31 of next year, meeting planners around the country are scrambling to make alternative arrangements or cancel their conventions altogether.
“The cities that are already in high demand for conventions are not going to be able to accommodate the business that wants to relocate. The cities with relatively less convention business, and Los Angeles may be one of them, are going to be looked at,” said Michael Collins, executive vice president of L.A. Inc.
Collins said L.A. Inc. has been in contact with meeting planners to gauge interest in relocating conventions; as of late last week, however, no decisions had been made.
The county’s other major convention center, in Long Beach, is largely booked over the next year and has only limited ability to handle relocated conventions, said Bob Maguglin, spokesman for the Long Beach Area Convention and Visitors Bureau. Nonetheless, Maguglin said the city has received several inquiries and is in discussions with the organizers of one major convention.
As for the larger tourism industry, little impact was expected from Katrina. The tourism markets for Los Angeles and New Orleans are distinct and the consensus among economists and tourism industry experts was that few people were going to divert their travel plans to Los Angeles.
*Staff reporters Rachel Brown, Deborah Crowe and Matt Myerhoff contributed to this story.
