U.S. economy expected to make a full recovery

After Hurricane Katrina ripped through the Gulf states this past fall, economists hastened to assure Americans that there was no cause for alarm. Natural disasters, they said, did not tend to have a lasting and crippling effect on the economy. But to U.S. citizens watching fuel prices spike to unheard-of levels, that proved surprisingly difficult to believe.

A full four months later, it appears the economists were right. Key economic indicators rose late last year, signaling strong growth for 2006. U.S. factory orders posted a solid increase in October, and the government reported the biggest jump in worker productivity in two years, leading many analysts to conclude that the economy was building up steam. "The momentum ... has been very strong," says Nariman Behravesh, chief economist at Global Insight in Lexington, Mass. "This suggests that growth ... [in 2006] will remain robust."

As for just how robust, a new report released by Global Insight predicts that both the U.S. and global economies will grow at a rate of about 3.5 percent in 2006, compared with 3.7 percent and 3.4 percent, respectively, in 2005. The Global Insight analysts remain bullish on the U.S. economy despite projected slowdowns in consumer spending and the housing sector. Those slowdowns will be offset by strength in capital spending and exports, they believe, as well as by a fiscal boost from hurricane-related reconstruction.

Down but not out
Despite the generally upbeat outlook for the nation as a whole, the Gulf Coast region was still grappling with Katrina's after-effects as 2005 drew to a close. At the end of the year, for example, the Port of New Orleans was still not operating at full capacity.

In addition, reports out of the Gulf States indicated that costs for warehousing space had more than doubled since Katrina hit, mostly because government agencies like the Federal Emergency Management Agency (FEMA) had gobbled up much of the available space. "FEMA and other federal agencies have been grabbing a hold of every square foot of space available around here," says Robert Baldridge, president of Wilson Group Logistics, a third-party logistics service provider based in Baton Rouge. Baldridge knows about the situation first hand; the government seized two of Wilson Group's buildings shortly after Hurricane Katrina hit.

Not only is distribution space scare, but prices have skyrocketed. "Rental prices have almost doubled from where they were because there is no space available," Baldridge reports. "The government is willing to pay more, so the people with space available are demanding more for what they have." But he thinks this will be a short-lived situation. "In our view, this is a temporary push and a year from now things will be different."

In the meantime, the U.S. shipping and trucking sectors appear to be recovering from Katrina-related setbacks. The U.S. transportation industry will enjoy strong performance in 2006, paced by gains in the resurgent trucking sector, according to the Colography Group Inc., an Atlanta-based market research firm. Colography projects that ground parcel shipments and less-than-truckload shipments will grow 5.1 percent and 3.8 percent, respectively, over 2005 levels. The two categories combined will account for 86 percent of new U.S. expedited shipment growth in 2006. Colography Group expects the U.S. expedited sector to expand by around 250 million shipments in the coming year.

It will be a different story in the domestic skies, however. Colography Group sees a softening demand for domestic air service in 2006,with shipment volumes rising by only 1.2 percent over projected 2005 totals. Things will be a bit better on the international side. The U.S. air export category will record a 7.3-percent increase in year-over-year shipment levels.

Future shock
Those growth projections notwithstanding, many remain jittery at the prospect of more economic shocks. But Global Insight's Behravesh believes there's no cause for alarm. He sees the U.S. and global economies' ability to withstand major blows over the last 12 months (a devastating tsunami, record hurricane damage, and the highest energy prices ever) as evidence of their hardiness. "This remarkable resilience indicates that growth will be sustained over the next couple of years," he says, "despite most shocks."

Though he acknowledges the possibility, Behravesh insists that it would take a remarkable series of events to trigger a global recession. To be precise, he says, it would take a combination of oil prices above $100 per barrel, inflation and interest rates running three percentage points above current levels, and a 10-percent drop in home prices across many industrial markets.

"Only if two or more severe shocks were to happen simultaneously would a recession become inevitable," he says. "All of those are possible but unlikely in either 2006 or 2007.