Americans have a great deal of experience with hurricanes. Katrina was the 95th to strike the U.S. since 1947.

One of the things this experience has taught us is that the devastation has often been quickly followed by increased economic activity as the stricken communities regroup.

Katrina will be different.

A typical hurricane does significant damage when it makes landfall, and then dissipates as it sweeps inland. After the hurricane departs, rebuilding begins almost immediately, and somewhat paradoxically, this can actually be quite stimulative.

Douglas Woodward, an economist at the University of South Carolina who has studied the effect of hurricanes on local economies, calls hurricanes “God-given make-work projects.” As people go to work repairing roofs, constructing new homes, removing debris and replacing damaged household items, the economy benefits.

Paradoxical Effect

During the Christmas after Hurricane Andrew hit south Florida in 1992, retail sales in the Miami-Dade County area rose 10 times faster than in the nation as a whole. Several national chains said their south Dade County stores were the best performers in the nation, according to the Miami Herald.

When Hurricanes Ivan and Frances struck the Gulf Coast last September, construction spending declined slightly in the next month but then increased 1.4 percent and 4.5 percent in the following two months.

This paradoxical economic benefit can be seen on a large scale as well. Woodward found that South Carolina's rebuilding efforts following Hurricane Hugo in 1989 delayed the start of the early 1990s recession for the state. The U.S. Bureau of Economic Analysis doesn't estimate the effects of a disaster on the national economy, but my own analysis of gross domestic product data from 1947 to 2005 shows that, with a two-quarter lag, a hurricane will boost growth by 0.3 percentage points.

Similarly, when a hurricane-force storm struck Denmark in December 1999, causing extensive and serious damage, the Danish Ministry of Finance calculated that the effect of the storm was to lift GDP by 0.8 percent in 2000 compared with what it would have been, and by a further 0.3 percent in 2001.

Boost to Growth

Economists Mark Skidmore of the University of Wisconsin- Whitewater and Hideki Toya of Nagoya City University in Japan conducted a multiple-country comparison of economic growth from 1960 to 1990 to investigate the long-run effect of climactic disasters such as hurricanes. They found that a one-standard- deviation increase in these events boosts the average annual growth rate by about half a percentage point. Even when many other factors influencing growth are included in the analysis, this relationship remains.

This experience perhaps explains why markets shrugged off the terrible damage last week. But Katrina will be different in a number of ways.

First, Katrina significantly disrupted production of oil, natural gas and electricity. “If the next weeks reveal that the losses are as large as some fear, this would constitute one of the biggest energy shocks since the 1970s, perhaps even the biggest,” energy expert Daniel Yergin wrote in the Wall Street Journal last week.

Lingering Effects

Energy supply shocks in the past have been associated with significant economic slowdowns. It is easy to envision very nightmarish supply shock scenarios. If folks panic and begin hoarding gasoline, inventories will disappear and prices will spike far higher than we have seen. The ripple effect through the economy could be painful. While the release of strategic reserves of oil will certainly soften the blow, world supplies are so tight relative to demand that sharp price increases remain possible.

Second, Katrina has led to the closing of the Port of New Orleans, and as of Sept. 2 it was unclear when it would reopen. This port is arguably the most important in the U.S. and is a key conduit for exports deriving from production along the Mississippi River from the Gulf of Mexico to Minnesota.

Many companies will have to find another way out for their products. This diversion will inevitably increase the prices of U.S. exports and cause real harm to producers.

Third, Katrina has not, like other hurricanes, gone away. While much of Alabama and Mississippi can already begin to rebuild, New Orleans is still under water. We cannot see the “Home Depot effect” there because flood waters still inundate much of the area that must be rebuilt.

While we wait, productive private business in the New Orleans area has effectively halted, costing the U.S. about $1 billion a week in lost GDP. While past hurricanes led to a surge in economic activity after a quarter or so, the lag between the hurricane and better times will be much longer this time around. The negative impact of Katrina will stretch well into next year.

Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI.