Macroeconomic and Budgetary Effects of Hurricanes Katrina and Rita

in Texas, the affected areas hold about 4 percent. In those states, the primary
effect on revenues will be reductions (if any) in income taxes as a result of lost
wages.
The Scale and Pace of Reconstruction Spending
The overall pace of reconstruction after the hurricanes is likely eventually to be
quite rapid, although significant delays and bottlenecks could occur in the
rebuilding effort and insurance settlements in some affected areas could be
somewhat slower than they have been in past disasters. Spending for rebuilding
and replacing privately owned structures, equipment, housing, and consumer
durable goods (that is, total private replacement and rebuilding) could rise to
between $20 billion and $40 billion (in 2005 dollars, measured annually) by the
first half of 2006. Almost a third of such spending would be in the energy sector;
another third would be in residential construction. The rebuilding of government
capital facilities would add to that reconstruction activity.
Housing
The scale of the devastation from the two storms suggests that a substantial
demand for construction services will emerge, but the problems associated with
rebuilding in New Orleans will delay and perhaps mute that response. Although
the speed of repair and rebuilding is always constrained by the availability of
funds and workers, residential construction is likely to add about $2 billion
(measured annually) to economic activity in the last half of 2005, CBO forecasts,
and about $10 billion in the first half of 2006. Those numbers, which represent
the midpoints of the range of CBO’s estimates, cover all construction associated
with the storms, regardless of where it takes place. (Some homeowners may not
rebuild on their original site but instead use the insurance payments they receive
to build or buy a home elsewhere.)
The midpoints of CBO’s estimates incorporate the assumption that it will take
three years to fully rebuild the housing stock. A two-year rebuilding period is
commonly used in such estimates, but CBO used a more conservative time frame
because the rebuilding of New Orleans poses unique problems. It appears that
property insurance compensation (private and flood insurance) and various grants
and low-cost loans will be timely enough to support such a pace of rebuilding.
The Energy Sector
Levels of oil and natural gas extraction may be lower than usual through the
middle of 2006, but the bulk of the Gulf coast’s pipeline and refinery operations
will probably be repaired by the end of this year. The pace and scale of repairs
will become clearer in the near future as assessments of damages to Gulf drilling
and undersea pipelines become available. The largest offshore facilities may be
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