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CEOs Gauge Katrina's Cost

By Eamon Javers The consumer outlook may be darkening, but a new survey of the CEOs of some of the nation's largest companies released on Sept. 21 shows continued economic confidence throughout American boardrooms in the aftermath of Hurricane Katrina.

At a meeting of the Business Roundtable in Washington, D.C., the group's chairman, Pfizer (PFE) CEO Hank McKinnell, said its Economic Outlook Survey shows few signs of major damage to the national economy. Sixty-one percent of CEOs surveyed described the effect of the hurricane on their business as moderately negative, while only 4% described it as strongly negative. "Katrina's effect will be catastrophic locally," McKinnell explained, adding that the storm would have "a significant -- but not catastrophic -- national effect."

The overall economic-outlook index calculated by the group declined to 88.2 from a pre-Katrina level of 95.9. The group expects 3.3% gross domestic product growth in 2005, two-tenths of a percentage point less than they had predicted before the storm (see BW Online, 9/22/05, "Katrina Relief? Just Put It on the Tab!").

DOWNWARD TRENDS. While the executives anticipated a short-term financial hit, they were more optimistic about future quarters. "Out there is good construction demand, and good demand, period," said Dow Chemical (DOW) CEO Andrew Liveris.

The fourth-quarter survey results were released even as a second major hurricane, Rita, bore down on the Gulf Coast, and they did reveal some worrying downward trends -- especially in capital spending, sales, and employment plans. The survey showed a 14-percentage-point decline in anticipated capital spending increases from the third-quarter survey. Sales expectations dropped by nine percentage points, and employment expectations dipped two points.

Jobs were on the CEOs' minds in the immediate wake of the disaster: "We focused on identifying and contacting our employees [in the area], and certainly providing job security and income security," said Xerox (XRX) CEO Anne Mulcahy.

MATERIAL WORLD. The business area that took the hardest hit from Katrina, according to the CEOs, was the price of energy -- cited by 29% of the corporate leaders surveyed. "The more cash that's taken out of a consumer's pocket and put into the back end of a vehicle, the less they have to spend on a variety of retail possibilities," said Office Depot (ODP) CEO Steve Odland. Other concerns were physical damage to infrastructure, cited by 27% of the executives, and supply disruptions, cited by 19%.

Another other area of concern highlighted by State Farm Insurance CEO Edward Rust is a sharp spike in prices of rebuilding supplies. "We're already seeing the costs of those goods and services that we need to procure are escalating," Rust said. "It will not diminish as we sit here and think about [Hurricane] Rita."

Javers is a correspondent in BusinessWeek's Washington bureau

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