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									            THE LOUISIANA ECONOMIC

              OUTLOOK: 2009 AND 2010

                       Prepared by:

                       Loren C. Scott
              Professor Emeritus in Economics

                  James A. Richardson
         John Rhea Alumni Professor of Economics
                Louisiana State University

                         M. Dek Terrell
           Freeport McMoRan Chair of Economics
& Director, Division of Economic Development and Forecasting


            Mary Jo Neathery, Managing Editor

                        Published by:
     Division of Economic Development and Forecasting
               E. J. Ourso College of Business
                  Louisiana State University
                      Baton Rouge, LA

                       October, 2008

       Though is may not appear so to the casual reader, putting together this document
is a massive undertaking with help from a lot of folks besides the authors. So many are
involved that we know will miss some of you as we pen this ack nowledgement.
Apologies in advance!

        The LEO is an expensive project and we could not get it into your hands without
the financial support of our sponsors---ExxonMobil, Cleco Corporation, and MidSouth
Bank. We welcome this year a new sponsor who absorbed the non-trivial cost of
printing the LEO, Blue Cross Blue Shield of Louisiana. Without their help we would
be unable to support the massive databases and computer programs needed to do our

        One of the things that hopefully make the LEO readable and interesting is the
input we get from individuals all across the state. We make about 200 phone calls
during the year to groups all across the state, including individual firms, chambers of
Commerce, economic development officials, etc. Your willingness to take our calls and
discuss what is going on in your industry or region adds an important element of realism
to our coverage and helps us become aware of those pesky turning points in the numbers.

        There are specific individuals that we are constantly bugging for data and
information which they provide willingly and cheerfully. Our man in the Legislative
Fiscal Office---Greg Albrecht---responds quickly to data requests and is most helpful in
policy analysis. Our main friend in the Louisiana Department of Economic Development
is Larry Collins. Larry, along with Secretary Stephen Moret and Steven Grissom has
been especially helpful this year with new entrants to our state. Our basic data on
employment come from Patty Granier in the Statistics Division of the new Workforce
Development Commission, a woman who has been efficiently responding to our data
requests for over a decade now.

        The LEO is published through the College of Business, and we welcome our new
leader Dean Eli Jones to the business school team. The support of the administration for
our work is absolutely vital. We will try to always make you proud of the publication,
Dean Jones.

      Speaking of major support within the college, our managing editor Mary Jo
Neathery is a jewel among jewels. She edits our report, manages the subscription list,
works with our printer, sees to it that you get your copy in a timely manner, and generally
manages our often untidy house. Retiring is not an option!

      Finally, our thanks again to Rolfe McCollister, publisher of the Business Report
Magazine, who allows us to release the LEO to great fanfare at his Expo’s Top 100
Luncheon. You are part of what has made this work, Rolfe.

       Thanks to you all!

                                EXECUTIVE SUMMARY

        Forecasting always takes place in a sphere of uncertainty, but this year it is much
worse. Are we in a recession or going into one? Where are energy prices heading? Will
inflationary pressures drive up interest rates? There is an unusually high level of
disagreement among forecasters about where these key drivers of the Louisiana economy
are heading. Our projections this year are based on the following assumptions:

      The national economy will avoid a recession but will instead experience a ―soft
       landing‖ with weak growth through the first half of 2009 and then accelerating
       nicely over the following 18 months.

      The 30-year fixed mortgage inte rest rate will rise about one full percentage
       point but will remain low by historical standards.

      Weakness in demand and new sources of supply will drive oil prices down to an
       average of $90 a barrel over the next two years, and natural gas prices will
       stabilize in the $8-$10 per MMBTU range.

      There are 5-6 major economic development projects being worked by the
       Louisiana Department of Economic Development that could ass significantly to
       the state’s employment future.

      Louisiana’s eight MSAs remain a picture of diversity not only in their basic
makeup but also in their outlook for the future.

      After being hammered by hurricanes Katrina and Rita employme nt in the New
       Orleans MSA has risen to about its 1979 level, but job-recovery sowed markedly
       in 2008---from about 5,836 jobs a month initially to about 1,268 per month over
       the past 19 months. We are estimating this MSA will add 6,000 jobs in 2009 and
       5,000 in 2010. Over $20 billion in ongoing and planned construction jobs will
       drive this growth, but the loss of some 1,300 jobs at Lockheed Martin Space
       Systems will be a severe drag on the MSA’s economy.

      The Baton Rouge MSA will continue its record-setting employment trajectory,
       adding 6,500 jobs in 2009 and 6,700 in 2010. Some $6.5 billion in construction
       projects will stimulate this growth, but new and expanding firms across a diverse
       group of industries will help as well.

      Great uncertainly surrounds the future of the Shreveport-Bossier MSA. Large
       layoffs at GM, Pilgrim’s Pride, and Beaird Industries is pulling the area down, but
       huge sums are being pumped into the MSA as extraction firms mine the new
       Haynesville Shale natural gas find. If Barksdale AFB hits on either the
       Cyberspace Command or the CBAT program, our forecast of 2,500 jobs in 2009
       and 3,000 in 2010 could turn out to be way too low.

      Lafayette MSA‟s continues to be propelled along by unusually high energy
       prices. We see little let up in this stimulus, with the MSA adding 3,000 jobs in
       2009 and 3,100 in 2010. Additionally boosting this region’s economy will be over
       one-half billion dollars in construction projects, an historically large number for
       this MSA. Lafayette should be the third fastest growing MSA in Louisiana over
       the next two years.

      The fastest growing MSA over 2009-10 should be the energy-dominated Houma
       MSA, adding 2,000 jobs in 2009 (+2.1 percent) and 2,200 in 2010 (+2.2 percent).
       Unusually high energy prices will keep the region’s extraction and extraction
       service firms well inflated, plus the area’s shipbuilders---especially Edison
       Chouest---are adding yards and are on a hiring binge.

      Bolstered by the largest single construction project in the region’s history
       (Leucadia), a new 1,400-person Shaw plant, and the opening of a new, 1,600-
       person casino (Sugarcane Bayou), Lake Charles should be the second fastest
       growing MSA in Louisiana over the next two years---adding 2,000 new jobs in
       2009 (+2.2 percent) and 1,800 in 2010 (+1.9 percent). A hefty amount of
       construction activity by chemical firms and LNG companies, combined with
       airport, road, and coastal restoration projects will further spur this area’s

      Due to a number of high-employment layoffs, the Monroe MSA economy has
       been in a slump for the past six years, and unfortunately there is little to suggest a
       substantive reversal in this trend. This MSA is projected to be the slowest
       growing in the state, adding only 400 jobs a year over 2009-10. If the LDED
       finds a new tenant for the nearby mega-site, prospects could turn positive quickly
       for Monroe.

      The smallest MSA in Louisiana---Alexandria---is entering a bit of a lull after the
       end of hiring at Union Tank Car and the near completion of the Cleco power
       plant. Adding 350 new jobs at the nearby federal prison and $208 million in road
       projects will help the area add 800 jobs in 2009 and another 500 in 2010, making
       it the second slowest growing MSA in the state.

      The 35 rural parishes in Louisiana grew impressively over the past four years
       and are grow solidly, but at a slower pace over 2009-10, adding 3,800 jobs next
       year (+1 percent) and 4,100 in 2010 (+1.1 percent). Especially good years are
       expected for Tangipahoa (hospitals), St. Mary (oil and gas), Vermillion (oil and
       gas), Vernon (military), and Webster (military) Parishes.

       In 2007, Louisiana recovered all the jobs lost as a result of Hurricanes Katrina and
Rita and began setting new employment records. The state as a whole should see
employment rise by 27,000 jobs in 2009 (+1.4 percent) and 26,800 jobs in

2010(+1.4%). By 2010, the state should be only about 4,500 jobs away from being a
2,000,000-job economy.
                                   Executive Summary Table

   Item                                           2008         2009        2010
     Real Gross Domestic Product                 1.7%          2.0%        3.5%
     Inflation Rate                              4.4 %         2.6%        1.7%
     30-Year Fixed Interest Rate                 6.19%        7.16%       7.27%
     Real Exchange Rate                          -7.3%        -1.8%        1.2%
     Oil Price: barrel                            $108       $80-$100    $80-$100
     Natural Gas Price: mmbtu                    $9.75        $8-$10      $8-$10

    Non-Farm Employment:                        1,941,700    1,968,700   1,995,500
    Percent Growth Rate: Employment               21,100       27,000     26,800
    Absolute Growth Rate                          1.1%         1.4%        1.4%

     Alexandria                                65,500       66,300       66,800
       Absolute Change                          200          800           500
       Percent Growth Rate                     0.3%         1.2%          0.8%
    Baton Rouge                               374,900      381,400      388,100
      Absolute Change                          4,400        6,500         6,700
      Percent Growth Rate                      1.2%         1.7%          1.8%
     Houma                                     96,400       98,400      100,600
      Absolute Change                           900         2,000         2,200
      Percent Growth Rate                      1.0%         2.1%          2.2%
     Lafayette                                151,500      154,500      157,600
      Absolute Change                          2,200        3,000         3,100
      Percent Growth Rate                      1.5%         2.0%          2.0%
     Lake Charles                              92,900       94,900       96,700
      Absolute Change                            0          2,000         1,800
      Percent Growth Rate                       0%          2.2%          1.9%
    Monroe                                     78,700       79,100       79,500
      Absolute Change                           200          400           400
      Percent Growth Rate                      0.3%         0.5%          0.5%
     New Orleans                              525,000      531,000      536,000
      Absolute Change                          8,700        6,000         5,000
      Percent Growth Rate                      1.7%         1.1%          0.9%
    Shreveport-Bossier                        181,400      183,900      186,900
      Absolute Change                          2,500        2,500         3,000
      Percent Growth Rate                      1.4%         1.4%          1.6%
   RURAL EMPLOYMENT                           375,400      379,200      383,300
      Absolute Change                          2,400        3,800         4,100
      Percent Growth Rate                      0.5%         1.0%          1.1%
   Source: First four items – Moody‟s, 8/08; Remainder – LSU forecasting

                                              TABLE OF CONTENTS

ACKNOWLEDGEMENTS ............................................................................................................ ii
EXECUTIVE SUMMARY ........................................................................................................... iii

OUTLOOK FOR 2009-2010:
 UNDERLYING ASSUMPTIONS................................................................................................1

         The National Economy ........................................................................................................1
                 The Housing Bubble ................................................................................................1
                 A Very Regional Downturn .....................................................................................2
                 Moody’s National Forecasts ............................................................3
                 NBER’s Measurements............................................................................................4
                    Non-Farm Employment ......................................................................................4
                    Industrial production ...........................................................................................5
                    Retail and manufacturing sales ...........................................................................5
                    Real personal income minus transfer payments..................................................6
         Interest Rates........................................................................................................................7
         Exchange Value of the Dollar ..............................................................................................8
         Oil Prices: Predicting the Unpredictable.............................................................................9
                 LEO Oil Price Forecast ..........................................................................................10
                 The Demand Side Response: U.S. ........................................................................10
                 The Demand Side Response: Rest of the World....................................................12
                 The Supply Side Response.....................................................................................12
         Natural Gas Prices: Some Hope for Stabilization .............................................................14
                 Natural Gas: Different from Oil............................................................................14
                 Natural Gas Price Factors ......................................................................................15
                 Natural Gas Demand: Power Plants the Key ........................................................15
                 Natural Gas Supply: Canada, the Independence Hub & the Shales .....................17
                    Domestic production .........................................................................................17
                    Canadian imports ..............................................................................................17
                    LNG imports .....................................................................................................17
                 Natural Gas Price Forecast.....................................................................................17
         Potential Projects Ahead ....................................................................................................18

A BRIEF HISTORY OF THE LOUISIANA ECONOMY ...........................................................19

         From Heady Boom to the First Big Recession ..................................................................19
         Climbing Out of the Abyss: 13 Years of Growth .............................................................19
         The ’99-’00 Slowdown ......................................................................................................21
         2001-02: The Second Recession in Three Decades ..........................................................21
                 2002: The Toughest Year of the Recession ..........................................................22
         2003 to Mid-2005: Slow, Plodding Recovery ..................................................................22
         Into the Abyss: Katrina and Rita.......................................................................................23
             Impact on the Offshore Oil and Gas Industry ..............................................................25
                 Zone 1: Offshore platforms...................................................................................25

                Zone 2: Underwater pipelines ...............................................................................27
                Zone 3: the onshore receiving units ......................................................................27
           Impact on Non-Farm Employment ..............................................................................28
        Out of the Abyss: Recovery Post-Katrina and Rita ..........................................................28

 METROPOLITAN STATISTICAL AREAS .............................................................................30

        The Eight MSAs: A Picture of Diversity ..........................................................................31
        The New Orleans MSA: Construction Big ―+‖; Space/Tourism Big ―-― .........................32
               History Pre-Katrina & Rita ....................................................................................32
               The Impact of Katrina & Rita ................................................................................34
                  Remarkable revision in job estimates ...............................................................34
                  Recovery rate still very slow.............................................................................35
                  Why the slow recovery?....................................................................................35
               Population data – Problem is behind the levees.....................................................37
               Forecast for 2009-10 ..............................................................................................38
                  The next two years ............................................................................................38
               The Really, Really Good News: Construction......................................................39
               The Really, Really Bad News: Lockheed Martin Space
                   Systems & Tourism..........................................................................................40
               Mixed Message: Manufacturing & Other Sectors ................................................41
        Baton Rouge: Construction + Good Diversity = Solid Growth ........................................41
               Petrochemicals, Construction, Universities & Government ..................................42
               Recent History of Baton Rouge .............................................................................42
                  The really good years ........................................................................................42
                  The really weak years .......................................................................................42
               The Katrina Effect..................................................................................................43
                  Evacuees in .......................................................................................................43
                  Evacuees out .....................................................................................................44
                  Katrina boosted employment ............................................................................44
               2007-08: Torrid at First, Then Slower ..................................................................44
               Forecast for 2009-10 ..............................................................................................45
               Construction Projects: Now at $6.5 Billion ..........................................................46
               New and Expanded Firms for the Baton Rouge MSA...........................................47
        Shreveport/Bossier: Uncertainty Cubed ...........................................................................48
               Shreveport/Bossier Recent Employment History ..................................................48
                  1985-89: The AT&T effect ..............................................................................48
                  Casinos to the rescue.........................................................................................49
                  Durable goods dependence & national recessions ............................................49
                  GM, Beaird, and Frymasters stop the fall .........................................................50
                  A Wild 2008......................................................................................................50
               Shreveport/Bossier Forecasts for 2009-10 .............................................................51
        Lafayette: Construction & Energy Boom + More Diversity ............................................53
               Recent History of Lafayette ...................................................................................54
               The Impact of Katrina & Rita ................................................................................55

                   Indirect energy effects.......................................................................................55
                   Evacuee effects .................................................................................................56
               2007-08: Slower but Still Healthy ........................................................................56
               Forecast for 2008 and 2009....................................................................................56
         Houma: Reaping the Rewards from High Energy Prices .................................................58
               Houma’s Recent History ........................................................................................59
                   The BOOM years ..............................................................................................59
                   The BUST years................................................................................................59
                   The long road back............................................................................................59
                   The little ―Vs‖ ...................................................................................................59
                   Legacy lawsuit effects.......................................................................................60
               The Katrina & Rita Effects ....................................................................................61
               2008: Explosive Growth Ends ..............................................................................61
               Forecast for 2009-10 ..............................................................................................62
               Oil & Gas Extraction: High energy Prices and the Lower Tertiary......................63
               Shipbuilding: Booming Chouest/Potential Boom for Bollinger ...........................63
               The Fabricators: Gulf Island Growing/McDermott Stable ...................................64
               Construction: Roads and Coastal Restoration.......................................................64
         Lake Charles: Big Boosts from Leucadia, Sugarcane Bayou, & Sonoma ........................64
               A History of Ups and Downs .................................................................................65
               The Surprising ―Rita Effect‖..................................................................................67
                   Note the ―V‖......................................................................................................67
                   Why the ―V‖......................................................................................................68
                   Rita’s impact on Lake Charles manufacturing..................................................68
                   Rita’s impact on the Lake Charles gaming sector ............................................69
                   Rita’s impact on other sectors ...........................................................................69
               Construction Still Strong: 2008 – a Lull ...............................................................69
               Forecast for 2009-10 ..............................................................................................70
               Aeroframe & Northrup Grumman: Mixed News...................................................71
         Monroe: Where’s the Meat? .............................................................................................72
               Monroe Employment History ................................................................................72
               Forecast for 2009-10 ..............................................................................................73
         Alexandria: Entering a Lull?.............................................................................................75
               Alexandria’s Recent Employment History ............................................................75
               Forecast for 2009-10 ..............................................................................................77

THE OUTLOOK FOR THE RURAL PARISHES: 2009-10 .......................................................79

THE OUTLOOK FOR THE STATE: 2009-10 ............................................................................82


IMPACT OF HURRICANE GUSTAV .........................................................................................90

                             OUTLOOK FOR 2009-2010:
                            UNDERLYING ASSUMPTIONS

        Well, shoot. We get a couple of years into the rebuilding process post-
Katrina/Rita and something else comes along to muddy the waters for the Louisiana
economy---a slowdown in the national economy. Or is it more than a slowdown? Are
we in the midst of a recession? If so, how deep will it get and how long will it last? How
will Louisiana’s economy fare through it all?

        Any forecaster will tell you that one of the toughest things to do is make
projections in the neighborhood of a turning point. Compounding the problem for our
forecasting team is the fact that the Louisiana economy is far more dependent than most
states on the oil and gas extraction sector, and oil prices are behaving like a roller coaster-
--that initial big part of the ride, where prices go sky high and then fall, sometimes
dramatically and sometimes slowly.

        Obviously, our outlook for the Louisiana economy over the next two years
depends crucially on our views of the state of, and future outlook for, the national
economy and energy prices. It has been a long time since the ―Underlying Assumptions‖
part of the Louisiana Economic Outlook (LEO) has been as important as it is this year.
Below, we will first address the outlook for the U.S. economy, along with projections for
interest rates and the exchange value o f the dollar. We will then attack those volatile oil
and natural gas prices and try to make sense of their irregular patterns.

         Also in this section we will address another factor that adds uncertainty to our
forecasts. We have a new Governor and a new Secretary of Economic Development.
How successful will this new team be in attracting new industry to the state? At this
writing, there are an unusual number of high- level prospects that have Louisiana on the
short list? On how many, if any, will Louisiana score a win?

                                  The National Economy

        Our media is filled with stories these days of sectors of the U.S. economy that are
struggling. This is especially so of the country’s housing and financial markets, whose
troubles are intricately tied together. The country went through a period in the early part
of the decade when housing prices were skyrocketing.

The Housing Bubble

        This housing price bubble was associated with very easy credit in the form of
sub-prime loans. These loans were given the nickname ―ninja‖ loans---no income, no
job, no assets. Credit checks were minimal. If a person’s breath could form a fog on a
mirror they got a mortgage loan, often for more than 100 percent of the value of the

____________________________________________________ __________________________________
                                 Economic Outlook Page 1
home. This may have made sense to the lender because rising home prices could always
be depended upon to increase the collateral value of the home.

        As it turns out, that last sentence was not true. As is the case with all financial
bubbles, this one finally burst and home values headed south. Many homeowners could
no longer make their mortgage payments and their loans went into foreclosure. As seen
in Figure 1, private residential spending in the U.S. fell by more than a third or nearly a
quarter of a trillion dollars between 2006-I and 2008-II.

                                      Fig. 1: U.S. Private Residential Investment

                             800                                      Since 2006-I:
                                                                      -$304.7 Billion
  Billions of 2000 Dollars






                               2003     2004      2005      2006      2007      2008
        Lenders ended up with assets that were not worth the value of the loan and had to
be written off. Negative ripples washed through (and are still washing through) the
financial sector, adding banks to the FDIC’s watch list, with some---like IndyMac—
actually failing. Investment banks that packaged some of the mortgage instruments have
come perilously close to failing. Indeed, one was basically bought out of bankruptcy by
J.P. Morgan Chase and the Federal Reserve System. Both Freddie Mac and Fannie Mae
had to be rescued by government intervention.

A Very Regional Downturn

        Many readers in Louisiana will have read the last few paragraphs and responded
―What home price escalation?‖ In point of fact, the rapid home price escalation of the
early 2000s was highly concentrated in states on the coasts---especially California,
Florida, and Massachusetts---and Arizona and Nevada. As a result, the radical home

____________________________________________________ __________________________________
                                 Economic Outlook Page 2
price reductions have been concentrated in those states. Two other states have
experienced serious home price decreases---Michigan and Ohio---but these declines were
related to a deteriorating auto industry, not just the bursting of the housing price bubble.

         The result is that the slowdown in the U.S. economy has been the most severe in
those seven states. The great middle part of the country has largely avoided large home
price declines and difficulties in their financial institutions. Louisiana falls solidly in this
latter group.

Moody‟s National Forecasts

        When one views a spending decline like the one shown in Figure 1, it is hard to
avoid concluding that the economy is heading into, or is already in, a recession.
However, it is important to note that it is possible to have problems in one sector without
bringing the entire economy down. While certainly not trivial, the housing sector is only
about 6.2 percent of our $13 trillion U.S. economy, and not all of the housing sector is in
trouble. Delinquency rates are nearly 20 percent among sub-prime mortgage loans but
are only about 5 percent among prime mortgage loans. Most home loans in the U.S. are
current. And again, housing problems are highly concentrated in seven states.

        Recent history and forecasts by Moody’s confirm this as shown in
Table 1. Note that in the 10 quarters since 2006-I the U.S economy has (1) enjoyed three
quarters of real gross domestic product (RGDP) growth nearing 5 percent, (2) 6 quarters
that were positive but under 2 percent, and (3) only one negative quarter and it was only
-0.2 percent.

                                   Table 1
                    Real Gross Domestic Product Forecasts
                               2006-1 – 2010-IV
      Quarter             Rate                Quarter              Rate
       2006-I              4.8                2008-III              1.9
      2006-II              2.7                2008-IV               1.2
      2006-III             0.8                 2009-I               1.1
      2006-IV              1.5                2009-II               2.5
       2007-I              0.1                2009-III              3.5
      2007-II              4.8                2009-IV               3.8
      2007-III             4.8                 2010-I               3.9
      2007-IV             -0.2                2010-II               3.3
       2008-I              0.9                2010-III              3.3
      2008-II              3.3                2010-IV               3.3
Source: Moody’s Numbers in italics are actual. Numbers in bold are

        By the ―classic‖ definition of a recession---at least two straight quarters of RGDP
declines---we have not been in a recession, and Moody’s is not forecasting one going
forward. Both recent history and Moody’s forecasts suggest a ―soft landing‖ not truly a

____________________________________________________ __________________________________
                                 Economic Outlook Page 3
recession. Moody‟s is projecting that the current slowdown will continue through
the first half of 2009, and then the economy will start to grow smartly again.

NBER‟s Measure ments

        We mentioned earlier that by the ―classic‖ definition of a recession we have not
been in one and it is projected the U.S. economy will avoid a recession. However, the
―classic‖ definition of a recession is not the ―technical‖ one that the National Bureau of
Economic Research uses. The NBER looks at four key economic indicators and none of
them unambiguously suggest a recession is underway.

       Non-Farm Employment. The clearest indicator of a troubled U.S. economy
comes from the monthly Bureau of Labor Statistics non- farm employment survey. As
seen in Figure 2, non- farm employment has been trending downward for 7 straight

               Fig. 2: Monthly Change in US Employment
                                                             Dec: +41,000
 1200                                                        Jan:   -76,000
                                                             Feb: -83,000
                                                             March: -86,000
  800                                                        April: -28,000
                                                             May: -62,000
                                                             June: -62,000
                                                             July:   -51,000



    1980          1985        1990         1995        2000        2005

                        Source: Bureau of Labor Statistics

       However, the BLS reports that the monthly employment change has to be +/-
104,000 to be significantly different from zero. Note that in no month has the decline
exceeded that number. Note secondly in Figure 2 how small the recent declines are in the

____________________________________________________ __________________________________
                                 Economic Outlook Page 4
chart compared to the recessions in the early 1980s, 1990s, and post 911.            While
worrisome, the message from this indicator is not clear that a recession is afoot.

        Industrial production. A second NBER indicator is industrial production,
whose recent behavior is graphed in Figure 3. This indicator (1) was down in February
and May, (2) but was up in January, March, April and June, and (3) has been basically
flat since the turn of the year. It looks somewhat like a saw tooth blade but not one
trending down.

                         Fig. 3: Industrial Production Index
                                                Up Jan, March, April & June
                                                    Down Feb & May
                                                     Flat: Dec-June






               1980   1985         1990        1995         2000        2005

                               Source: St. Louis Federal Reserve

         Retail and manufacturing sales. A third NBER indicator is manufacturing and
retail sales, which are graphed in Figure 4. Like the industrial production series, sales
data show the saw tooth pattern but one that is essentially staying level. Sales were (1)
down in December, February, and March, but (2) were up in January, and the last three
months available.

____________________________________________________ __________________________________
                                 Economic Outlook Page 5
                                          Fig. 4: Real Manufacturing & Trade Sector Sales

  Millions of 1996 Dollars

                                                                                                  Dec: -0.7%
                                                                                                  Jan: +0.6%
                             700000                                                               Feb: -1.5%
                                                                                                  Mar: -0.1%
                                                                                                  Apr: +1.0%
                             600000                                                               May: +0.02%
                                                                                                  Jun.: +0.2%

                                         90    92    94        96        98        00        02        04        06        08

                                Fig. 5: Real Personal Income Minus Transfer Payments

  Billions of 2000 Dollars



                                                                    Down Very Slightly: March & May
                                                                    Up Slightly Jan., Feb, Ap, & June

                                    90    92    94        96        98        00        02        04        06        08

       Real personal income minus transfer payme nts. This final NBER indicator
reads where the rubber hits the road. It represents the money people receive from
____________________________________________________ __________________________________
                                 Economic Outlook Page 6
working---i.e., they have jobs---rather than money received from social security,
unemployment compensation, welfare payments, etc. As seen in Figure 5 above, this
indicator has essentially been flat recently. It was down slightly in March and May, but it
was up slightly in January, February, April and June. The signal here is of a soft landing,
not a recession.

        Our conclusion from this review of Moody’s forecast and NBER indicators:
There is not an unambiguous signal that the eco nomy is in a recession. The economy is
certainly in a slow growth mode. Major forecasting models are not forecasting a
recession and certainly not a major downturn. The forecasts suggest a solid economy that
will overcome the disruptions of certain markets like housing.

                                     Inte rest Rates

        One encouraging consideration for the housing market is the projected pattern of
30-year fixed mortgage interest rate, which is shown in Figure 6. In the early 80s the
housing market was devastated by historically high interest rates. At one point in 1981-
IV this rate exceeded 16 percent!

                      Fig. 6: 30-Year Fixed Mortgage Rate


         14                                         2008-II - 2010-IV:
                                                    +91 basis points




         1975     1980      1985     1990      1995     2000      2005     2010

                          Source: Moody's, 8/08

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                                 Economic Outlook Page 7
        The primary culprit behind those exceedingly high rates was inflation, which was
rocking along at 18.5 percent. Alan Greenspan and the Federal Reserve did a yeoman’s
job in fighting off the inflation demons, so the inflationary premium component of the
interest rate began to fall. Mr. Greenspan has been replaced by Mr. Bernacke who is also
an inflation hawk and committed to keeping inflation under control. Moody’s apparently
believes this and has the 30-year fixed rate in 2010-IV only 91 basis points higher
than in 2008-II.

                              Exchange Value of the Dollar

        One of the reasons that the national economy has done as well as it has in the face
of the housing crunch is because U.S. exports have been doing so well. The key to our
country’s excellent sales to foreigners of late is found in Figure 7, which tracks the
behavior of the exchange value of the dollar in international trade.

               Fig. 7: Real Exchange Value of the Dollar




   90                                                      2002-2008:

    1975       1980       1985      1990       1995       2000      2005       2010

                         Source: Moody's, 8/08

          A drop of 25.5 percent in this indicator since 2002 means that even if we had kept
the prices of our goods and services constant over that period, in terms of other countries’
currencies, prices of U.S. goods have fallen 25.5%---a nice sale on U.S. products! In
reality, not all of the reduction in the value of the dollar is passed on to foreigners, but a
lot is, thereby helping our export sales.

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                                 Economic Outlook Page 8
        Moody’s is projecting that the decline in the value of the dollar will continue
through the first half of 2009 before starting to rally through the end of 2010. As an
aside, one of the reasons that foreign demand for oil has not fallen as much as U.S.
demand is because oil is priced in dollars in the world market. We have seen one
analysis showing that oil prices in terms of euros has risen about one-half that of the rise
in dollars. Consumers in Europe have not experienced nearly the oil price spike that U.S.
consumers have borne.

                                Oil Prices: Predicting the Unpredictable

 “I have shown that simple no-change forecasts are the most accurate forecasts of the
     price of crude oil in practice. In other words, the change in the price of oil is
                                  Professor Lutz Kilian

         To understand why Professor Kilian came to such a conclusion, take a good look
at Figure 8 which traces the price of Louisiana sweet crude oil from 1975 through our
forecast for 2009-10. Actually, the price of oil used to be one of the easiest variables in
the economy to predict. From 1950 through the early 1970s, the price of oil was very
stable, ranging between $2 and $3 a barrel.

                               Fig. 8: Price of Louisiana Sweet Crude

                     100                            POA-Low = $80
                                                    POA-High = $100
                                                    POA-Avg = $90
  Price per Barrel


                      40                       Price of
                                            Louisiana Sweet

                       1975   1980   1985     1990     1995      2000      2005   2010

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                                 Economic Outlook Page 9
         OPEC began to flex its muscles in the mid-70s and things have been very
different ever since. There have been periodic supply disruptions in countries such as
Nigeria, Venezuela, Mexico, etc. In fact, a recent Federal Reserve of Dallas study found
that two-thirds of the oil reserves in the world are located under countries that are mostly
repressed or where the state government is running the oil company---that is, where the
market system is not allowed to work. In recent years, oil prices have also been boosted
by a sudden demand surge in developing countries, especially China and India. As a
result, the price of oil has varied from a low of under $10 a barrel to a high of over $145
over the last two decades. In the last two months of the summer of 2008 alone, oil prices
fell from a high of $148 to a low of $113 a barrel! No wonder Professor Kilian’s
modeling effort led to the conclusion that oil prices are flat unpredictable.

LEO Oil Price Forecast

         Unfortunately, one cannot make projections about the Louisiana economy without
forecasting oil prices as well. Oil is just too important to ignore in this state. Including
production from federal offshore waters, Louisiana is the country’s #1 producer of crude
oil and its #2 producer of natural gas. Energy prices drive a significant portion of the
state’s economy, in particular oil and gas extraction activities, fabrication companies, and
shipbuilders servicing the industry’s offshore segment. The Lafayette and Houma MSAs,
and to no small degree the New Orleans MSA, have very significant ties to the energy
sector and related industries. The discovery of the Haynesville Shale formation in
northwest Louisiana has made natural gas a big player in the Shreveport-Bossier
economy as well.

        Our forecasts for the next two years assume that oil prices will range from a
high of $100 to a low of $80 on an annual average basis. Why have oil prices recently
experienced a significant decline and why do we expect them to settle in the $80-$100
range? To no small extent, what we are seeing in today’s market mimics what occurred
the last time the country went through an oil price spike. There were predictable
responses on both the demand and supply sides of the market.

The Demand Side Response: U.S.

       An important phenomenon in economics is the law of demand. This law states
that when the price of a good or service rises people b uy less, other things remaining the
same. We have no scientific evidence of any product or service for which this law has
been violated. That is a key premise to remember when attempting to understand energy

       The data in Table 2 illustrate this principle at work. Note what happened to the
demand for gasoline (and hence, oil) during and after the oil price spikes in 1974 and in
1979-81. Over the 12- year period from 1962-73 the price of regular gasoline varied over
a very narrow range of $.31 - $.35 a gallon. The price of gasoline did not even keep up
with the consumer price index; that is, the real price of gasoline fell. Per capita

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                                Economic Outlook Page 10
consumption of gasoline rose at an annual rate of 3.6 percent per year. Then in 1974 the
Arab oil embargo occurred and the price of gasoline jumped to $.52 per gallon. Per capita
consumption of gasoline fell 3.3 percent. The law of demand was at work.

                                         Table 2
            Gasoline Prices and Per Capita Consumption in the U.S.: 1962-81

           Years                Price: Regular Gasoline        Per Capita Consumption
          1962-73                       $.31-$.35                        3.6%
           1974                            $.52                         -3.3%
          1975-78                       $.52-$.66                        1.5%
           1979                            $.88                         -4.6%
           1980                           $1.22                         -6.6%
           1981                           $1.31                         -5.8%

        Over the 4-year period from 1975-78 the price of gasoline varied over a narrow
range of only $.52 - $.66 per gallon. Again, the price did not keep up with the CPI. The
real price of gasoline fell and per capita consumption began to rise again, but at a much
slower rate of 1.5 percent per year.

        It was in 1979 that the Iranian crisis occurred. Over the 3-year period from 1979-
81 the price of gasoline leapt from $.88 per gallon to $1.31. Per capita consumption fell a
whopping 17 percent. Instead of spending their weekends riding around town in a big,
gas guzzling auto, families bought smaller, more fuel efficient cars, insulated their homes
better, started using public transportation, moved closer to their jobs, and whatever else
they could do to reduce their consumption of fuel.

       Does this sound familiar? People in the U.S. have reacted to the recent run up in
gasoline prices by repeating that behavior. Consider the following:

      Sales of large cars in the U.S. fell 2.6% in 2006 and another 10.5% in 2007
      In the first seven months of 2008:
           o Large SUV sales: -33%
           o Mid-size SUV sales: -29.7%
           o Luxury SUV sales: -14.7%
           o Large car sales: -31.2%
           o Compact car sales: +10.9%
      Americans drove 53.2 billion fewer miles between November 2007 and June 2008
       compared to the same eight- month period last year. That is a larger decline than
       the 49.3 billion fewer miles driven by Americans in the entire decade of the 70s
       which was marked by embargoes and gasoline lines
      Comparing miles driven in June 2008 to June 2007 shows a drop of 4.7%, the
       largest monthly drop in this number since the Department of Transportation began
       to collect this statistic in 1942.

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                                Economic Outlook Page 11
       People are doing the same thing today as in the 1979-81 period. An economist
would say they are ―moving up the demand curve‖ and consuming less gasoline and oil.

The Demand Side Response: Rest of the World

        In the rest of the world we see similar, but more muted demand side responses to
higher oil prices. The response has been more muted for two reasons. First, oil is priced
in dollars internationally. As seen back in Figure 7, there has been a marked decline in
the exchange value of the dollar, which means if you are in Europe and using euros,
rather than dollars, to buy oil, the price has not risen nearly as much as in the U.S.
Secondly, several nations---especially in Asia---have imposed price controls on gasoline.

        Even with these interventions, the growth rate in world oil consumption had
declined significantly even before the recent run up to the $145 range, as shown in Table
3. World oil demand slowed from a 3.4 percent annual rate to less than one percent
growth in 2007, and that was a year when the price was only at about $64 a barrel. Note
that by 2007 even China’s demand for crude had slowed to half the rate of 2004, even
with price controls in place for gasoline.

                                       Table 3
                       Change in World Demand for Oil: 2004-07

            Year                         China              Growth in World Demand for
           2004                          14.7%                         3.4%
           2005                           7.8%                         1.6%
           2006                           8.2%                         1.3%
           2007                           6.2%                         0.9%

        Data for 2008 are not available, but we expect the world figure to be negative for
this year. Not only has U.S. consumption turned negative, but also Thailand has allowed
prices to move with the market and price ceilings in three Asian countries were raised in
June as follows: China - +17 percent; India - +10 percent; and Malaysia - +41 percent.

        As prices go up in these much poorer countries, they will generally not have the
option to moving to smaller, more fuel efficient cars. They are already driving those.
Their most likely option is to drop down to motor scooters! We have seen one estimate
that India’s demand for motor scooters is projected to rise by 13.9 percent to 44.4 million
units by 2011.

The Supply Side Response

        We demonstrated above that we are experiencing today a demand side response
similar to that under the last price spike. The same is true for the supply side. When oil
prices jumped back in the late 70s, capitalists began to explore and find oil in places

____________________________________________________ __________________________________
                                Economic Outlook Page 12
previously thought unproductive, such as the North Sea, Prudhoe bay in Alaska, and two
mile-deep waters in the Gulf of Mexico and the horn of Africa.

      Notice that the same thing is happening worldwide today.             Here are some

      Companies drilling in two mile-deep waters in the Gulf of Mexico (GOM) have
       pushed pipe another 5 miles deep into the GOM floor to discover the lowe r
       tertiary trend, a field thought to hold as much as 15 billion barrels of oil---as the
       Prudhoe Bay discovery.
      While exploring deep waters off of the Brazilian coast, companies have
            o the Tupi field, thought to hold 11 billion barrels of recoverable oil; and
            o the New Carioca Field, which may contain as much as 33 billion barrels.
      The Saudis are spending $15 billion to develop the previously ignored Khurais
       field, which could add 1.2 million barrels a day (mmbd) to world oil production.
      Companies are feverishly mining tar sands in Canada’s Athabasca tar fields and
       in Venezuela’s Orinoco Oil Belt. These two fields alone are believed to hold 3.5
       trillion barrels of recoverable oil. The world consumes about 30 billion barrels a
       year. That means these two sands hold enough oil to supply the world for 100
       years. It is expensive to mine, but at $80-$100 a barrel is still very profitable.

       There is a final very important source of oil with which the general public is
unfamiliar---enhanced oil recovery (EOR). Figure 9 illustrates how EOR works.

                                       Figure 9
                                 Underground Oil Field

____________________________________________________ __________________________________
                                Economic Outlook Page 13
        Figure 9 pictures a swimming pool of oil under a salt dome several thousand feet
under the ground. Most people think you sink the middle pipe into the pool and just suck
up all the oil. In reality, this is a swimming pool full of oil, sand, rocks, etc. Sometimes
the pool has the same consistency as building blocks.

        Simply puncturing the pool with a drill bit will cause perhaps 10-12 percent of the
oil to come to the surface, a process known as primary recovery. If you want more oil
out of the pool you can drill two other wells to the side and pump water down these two
wells. The water forces more oil loose from the rocks and up through the center well.
This is known as secondary recovery or water flooding. You may get another 10-12
percent of the oil out of the pool.

         Primary and secondary recovery techniques are essentially what has been used in
all the oil fields in the world. That means that below every well in the world we are
leaving about 78 percent of the oil in the pool! It’s not a matter of going further offshore
or deeper into the ground or into the Artic to explore. We know exactly where this oil is.
It is just a matter of getting it up. Clever capitalists are working on EOR techniques such
as injecting chemicals or steam into the well to improve the recovery rate. If we could
use EOR techniques to improve our percentage recovery just one percent---from 78
to 77 percent recovery---we could add three years of world oil consumption to our
supplies. As oil prices stay in the $80-$100 range, oil companies are working feverishly
to make this possible.

                   Natural Gas Prices: Some Hope for Stabilization

        As we have pointed out in previous LEOs, the natural gas market is very different
from the oil market. Examine the price listings in the Wall Street Journal and you will
discover that the price of oil----whether it be Bonny Light, West Texas Intermediate,
Saudi Light, or Mexico Isthmus---is the same everywhere in the world except for quality
and transportation adjustments. That is because there are about 3,700 Very Large Crude
Carriers (VLCCs) plying the oceans taking oil wherever they can get the best price. That
has a tendency to keep the price the same everywhere. The U.S. imports about two-thirds
of the crude oil it consumes via these VLCCs.

Natural Gas: Different from Oil

         Natural gas is not like that. There are only about 250 Liquefied Natural Gas
(LNG) carriers on the oceans. Of the 2007 U.S. consumption of 23 trillion cubic feet
(tcf), imports via LNG carrier comprise less than three percent (0.8 tcf). We rely for our
natural gas primarily on what we can produce domestically (19.1 tcf) and a small amount
of pipeline imports from Canada and Mexico (3.8 tcf).

____________________________________________________ __________________________________
                                Economic Outlook Page 14
        Because of the absence of a vast LNG fleet, the price of natural gas varies
considerably across countries. In the U.S., it may sell for $9.50 per million British
thermal units (mmbtu), while in Trinidad it is priced at $1, and in Russia natural gas is so
plentiful that it is flared off as a nuisance.

Natural Gas Price Factors

        Figure 10 illustrates the pattern in the price of natural gas (per million BTU--
mmbtu) since 1975. After varying rather consistently close to $2 per mmbtu from 1980
to 1999, the price of this fuel began a climb upward that has been interrupted in three
different years by noticeable price declines.

                     Fig. 10: Wellhead Price of Natural Gas - Louisiana

                10                            Average: $9.00
                                              High:   $8.00
                 8                            Low:    $10.00
  $ Per MMBTU




                 1975    1980   1985   1990      1995      2000      2005      2010
        In last year’s LEO we had voiced an expectation that natural gas prices had settled
in a new $6.50 mmbtu level. However, natural gas prices jumped by nearly $3 to $9.75
mmbtu in 2008. What is behind this price increase? Well, it is the price of something so
it must be because of supply or demand conditions. As it turns out, it was the demand
side that was the driver of the 2008 price spike.

Natural Gas Demand: Powe r Plants the Key

        The Energy Information Administration (EIA) collects data on consumption of
natural gas by end user. These end users can be divided into three groups: (1) residential,

____________________________________________________ __________________________________
                                Economic Outlook Page 15
(2) commercial, (3) industrial, and power plants. Figure 11 depicts how natural gas usage
across these four groups varied over 1997-2007.

                                          Fig. 11: Natural Gas Consumption by Sector


  Millions of Cubic Feet




                                     97   98   99   00   01   02    03        04   05       06   07

        Note that both residential and commercial usage was relatively constant over this
11-year time frame. However, Industrial consumption has trended downward over the
entire period, but the trend downward accelerated somewhat when natural gas prices
started to spike post-1999. Industrial users, which have historically been the largest
consumers of natural gas, also have considerable incentives to conserve or even shut
down if this fuel price gets too high. Some even have the capability to switch to
alternative fuel sources, like fuel oil. Declines in industrial consumption were so great
over 2000-2006 that total natural gas consumption in the U.S. fell by 7.2 percent or 1.7
billion cubic feet.

        While industrial consumption was trending downward, note that natural gas used
in powe r plants was moving up sharply (except for 2003). Beginning in the late 1990s
many electric power companies began to construct small, two-turbine power plants run
by clean-burning natural gas. These new plants have been slowly coming on line.
Consumption by this group grew so much that in 2007 it surpassed the industrial sector in
usage. In fact, power plant usage was so strong in 2007 that total U.S. natural gas
consumption rose (by 6.2 percent) for the first time in seven years. It was this growth that
ultimately generated the price spike in 2008.

____________________________________________________ __________________________________
                                Economic Outlook Page 16
Natural Gas Supply: Canada, the Independence Hub & the Shales

       The spike in natural gas prices in 2008 would have been even more severe had in
not been for some nice gains in natural gas supplies recently. Our natural gas comes
from three primary sources.

        Domestic production. The first is domestic production. Domestic production
was up 2.4 percent in 2006 and 3.3 percent in 2007 after suffering declines in both 2004
and 2005. There is every reason to believe this trend will continue. As we mentioned in
last year’s LEO, the Independence Hub opened in August 2007. Located in 8,000 feet
of water 123 miles southeast of Biloxi, Mississippi, the Independence Hub is the deepest
production platform ever installed and is the world’s largest offshore natural gas
processing facility. It is producing natural gas from fifteen deepwater wells. Production
is estimated to be 1 bcf per day----enough to boost Gulf of Mexico production by 10
percent, which is enough to power 4.8 million homes a year.

        Secondly, advances in drilling and production technology have made several
shale plays in the U.S. economical. Among these are the Barnett Shale in North Texas
(29 tcf), the Fayetteville Shale in Arkansas (11tcf), and the new field in Northwest
Louisiana---the Haynesville Shale (20 tcf). Other shale deposits are being explored in
Alabama and the Appalachian states.

        Thirdly, there is encouraging evidence that shallow-wate r, ultra-deep (25,000
feet) wells in the Gulf of Mexico could produce as much as 20 tcf of natural gas. All
three of these sources suggest a relatively bright future for domestic natural gas supplies.

        Canadian imports. After declining by 2.9 percent in 2006, imports of natural
gas from Canada rebounded in 2007, up by 4.8 percent. Canada has been diverting some
natural gas to shale oil production, but appears now to be expanding its flows to the U.S.

         LNG imports. Though the U.S. has expanded capacity at existing LNG import
facilities and has constructed a couple of new ones in and off the coast of Louisiana,
LNG imports remain a very small natural gas source in 2007. We imported only 0.8 tcf
via LNG carrier in 2007, but the good news is that imports were up 24.3 percent over
2006. Actually, 2007 was our first year of increase in LNG imports in three years.

Natural Gas Price Forecast

        As seen back in figure 10 we are forecasting a slight decline in natural gas prices
in 2009-10 to an average of $9.00 per mmbtu with an expected range of $8-$10. We
believe that the new gas coming from the shales will begin to tug natural gas prices lower
the next two years.

____________________________________________________ __________________________________
                                Economic Outlook Page 17
                                Potential Projects Ahead

        Unlike so many years in the past, uncertainty about our projections for 2009-2010
are muddied by the prospect of some big hits by the Louisiana Department of Economic
Development. There is a new administration in place at the Governor’s mansion---
Governor Bobby Jindal---and a new Secretary of Economic Development---Stephen
Moret. Both parties are in their first year in office, and while we are very hopeful about
the success of this team, only time will tell how successful they will be.

       The good news is that the team has some really large potential winners on the
hook. The largest is the Nucor Corporation that may locate a new iron mill at a site in
St. James Parish. Nucor would spend $2.0 billion in the first two years constructing
Phase I of the mill, an activity that we estimate will support 11,559 jobs in Louisiana.
Once open, Nucor would employ 500 people in Phase I. The firm is considering
spending another $1.6 billion on two more phases. The Chairman of Nucor has indicated
that Louisiana is the preferred location over a site in Brazil and is waiting on final permit
approval in Louisiana. According to him, ―The ball is in Louisiana’s court.‖

             The Shreveport-Bossier MSA would reap 600 new manufacturing jobs if
the MSA beats out Sherman, Texas for the codename Lynx project. This MSA stands to
be a big winner if Barksdale Air Force Base becomes the new location for the
Cybe rspace Command and/or the CBAT training program.

       Bollinger Shipyards, with several locations across south Louisiana has been
working on several large military contracts that should come to a head over our forecast
period. In Lake Charles, the Northrop Grumman Corporation could double its 300-
person workforce if it can land a new KC-10 maintenance contract.

        The Monroe area is working with LDED to market a mega-site in the area to a
potential car manufacturer and to find a new tenant for the now-empty Guide headlight

       All the state has to do is be successful on two or three of these potential clients
and our forecasts will turn out too pessimistic, indeed. We wish the new administration
much luck in this endeavor.

____________________________________________________ __________________________________
                                Economic Outlook Page 18

        We insert at this point in the LEO a brief history of the Louisiana economy so
that readers can understand what forces have driven the economy over the past three
decades. It also provides us with the opportunity to illustrate the profound impact that
Hurricanes Katrina and Rita had on the state. For a good visual reference, Figure 12
tracks non- farm employment in Louisiana over 1975-2008.

                     From Heady Boom to the First Big Recession

        The years from 1975-81 were heady ones for the Louisiana economy. The price
of crude oil had risen from only $7.09 a barrel in 1975 to a whopping $37.48 at one point
in early 1981 (about $93 in 2008 dollars). The southern part of the state especially
became like a gold mining town in the gold rush days. Employment in the oil and gas
extraction sector rocketed up from about 50,000 in 1975 to just over 102,000 at one point
in 1981.

       As seen in Figure 12, overall non-farm employment boomed as well, rising at an
average rate of 4.1 percent a year over 1975-81. In 1978, employment jumped a
remarkable 7.2 percent in one year.

         Then from 1982-87, Louisiana went through a terrible recessionary period---at
that time the worst in its recorded history. Nearly 148,000 jobs vanished within the state,
or about 9 percent of the workforce. Plunging energy prices cut the extraction workforce
in half, and a huge run up in the value of the dollar virtually destroyed the export markets
for our chemicals, prompting that industry to layoff a third of its workers. The negative
multiplier effects of these firings added to the misery.

                   Climbing Out of the Abyss: 13 Years of Growth

        As seen in Figure 12, the state in 1988 began the long climb out of the abyss into
which it had fallen in the previous six years. The primary driver behind this recovery
was the chemical industry. In 1985, a complete reversal in the trend of the exchange
value of the dollar occurred (see Figure 7). Now foreigners were observing U.S.
chemical prices declining dramatically in terms of their own currencies. The result was a
very strong resurgence in the demand for Louisiana chemicals. Chemical firms began
large-scale capital expansion projects, augmenting employment not only in chemicals but
also in the industrial construction sector.

        Fortunately, growth was occurring in other sectors as well, helping to diversify
the economy and making it less vulnerable to negative trends in any one industry. The
transportation equipment industry, once heavily tied to oil and gas related activities,
diversified into defense contracting and more general shipbuilding. The textile industry
began a major expansion, led by Fruit-of-the-Loom, a firm which expanded so much that
it became the largest manufacturing firm in the state, as measured by employment.

____________________________________________________ __________________________________
                                Economic Outlook Page 19
                        Fig. 12: Louisiana Non-Farm Employment
                                    X=2007: +67,400 jobs (3.6%)
                                   3,100 jobs above previous peak               X
              1800                   13 Straight years          Second
                                      of Growth                Recession:
              1700                                              2001-02:

                                                               -22,100 Jobs
              1600                                               (-1.2%)

              1500                                                      2005-06:
                            1982-87:                                  -64,300 Jobs
              1400       Recessionary Years                              (-3.4%)
                          -147,900 Jobs
              1300           (-9.0%)

                 1975   1980    1985       1990      1995       2000      2005
        Healthcare also enjoyed a major expansion during this period due to a huge
injection of federal Medicaid monies into the state. Medicaid dollars rose from under one
billion dollars in 1989 to over three billion by 1993. By 1993, the state had finally
recovered all the jobs lost during the terrible recession of 1982-87 and began to set new
employment records.

        Note in Figure 12 that the 5 years from 1994 to 1998 were especially good ones
for the state. Employment grew at rates of 3.8, 2.9, 2.1, 2.2, and 2.1 percent,
respectively. These were rates in excess of the nation’s performance.

       Several industries contributed to this nice spurt of very strong growth. After 12
years of employment declines, the oil and gas extraction sector began a solid recovery,
which pulled along all those industries that sell products and services to it.

        In 1993, there was no casino industry in Louisiana. Pre-Katrina and Rita, about
19,713 jobs had been created in Louisiana’s 15 riverboat casinos, its four racinos, and its
sole land-based casino. And this employment number does not include the people
working at the three Indian casinos in the state. Changes in Federal policies governing
the harvest of timber on publicly owned lands in the Pacific Northwest drove several new
lumbe r companies to Louisiana during this period.

____________________________________________________ __________________________________
                                Economic Outlook Page 20
        These sectors provided an extraordinary boost to an economy, which was, in
general, doing well across several sectors. The result was unusually expansive
employment in those five years.

                                  The ‟99-„00 Slowdown

         It is apparent from Figure 12 that 1999 was anything but a banner year for the
state. In the early part of 1998 the price of oil began a slide that did not end until it moved
below $10 a barrel---a level not seen since the horrendous recessionary year of 1986. For
a while the extraction industry held on, but then the bloodletting began. Blue-collar jobs
were eliminated as the rig count dropped from 218 to 125. Then mergers and
consolidations among both exploration and services firms meant white-collar layoffs or
relocations to Houston. Between 98-III and 99-III, 13,100 jobs were lost in Louisiana’s
extraction industry. Ancillary firms, such as fabricators, machine shops, and ship
builders, were pulled down along with the industry.

       As we will discover later in our report on the metropolitan areas, the Lafayette
and Houma MSAs were especially impacted by these layoffs. Despite these blows,
Louisiana’s employment actually grew marginally in 1999, though by only 0.4 percent.

        In the latter part of 1999 and early 2000, both oil and natural gas prices began an
unexpected and remarkable move upward. By 2000-IV, oil prices had jumped to $32.57
a barrel and natural gas averaged $5.71 per mcf. At one point in the winter of 2001,
natural gas was priced at over $10.50 per mmbtu at the Henry Hub.

        The extraction industry began its move back into the oil patch, slowly at first, then
picking up momentum. The rig count rose back through its previous peak of 218 and
attained 232 at one point. This nice stimulus from the extraction industry boosted the
state’s employment back up by 1.2% (see Figure 12). This was still not very stellar
growth, especially when compared to the 1994-98 period.

                   2001-02: The Second Recession in Three Decades

       It is clear from the picture in Figure 12 that, like the national economy, the years
2001 and 2002 were not great ones for Louisiana. Employment fell by 2,300 jobs in
2001 and by 19,800 jobs in 2002. That is a total of 22,100 jobs over the 2-year period
or a decline of 1.2%.

        However, there was some good news in the numbers. Louisiana did lose 1.2
percent of its jobs, but apparently most states endured an even worse job loss. U.S.
payroll employment fell by 2,598,000 jobs between March 2001 and June 2003. That
represents a 2.0% decline---higher than the Louisiana loss.

         Why did the national recession hit Louisiana a bit more lightly than other states?
Two factors were at work. First, when the nation enters a recession the first industry to
get hit is the durable goods industry. After all, people have to buy food and utilities, but

____________________________________________________ __________________________________
                                Economic Outlook Page 21
they can postpone buying appliances, cars, homes, boats, etc. In the U.S., 6.4 percent of
employment is in durable goods industries. In Louisiana that figure is only 4.6 percent,
and much of that income comes from national defense shipbuilding or manufacturing
platforms and rigs for the extraction industry---areas pretty immune from national
recessions. Louisiana did not have a major durable goods manufacturing sector that was
laying people off.

       As an aside, durable goods employment is 9.4, 9.2, and 8.3 percent of jobs in
Mississippi, Alabama, and Arkansas, respectively. Employment cuts are typically much
deeper and longer in these states as compared to Louisiana.

        A second aide to Louisiana was the fact that up until the very end of 2001, the
extraction sector was doing quite well. That sector also enjoyed a mild recovery of sorts
in 2003. This is a safety net that was enjoyed by only a couple of states, like Texas and

2002: The Toughest Year of the Recession

        As mentioned earlier, 2002 was the toughest of the post-911 recession in
Louisiana. Several events combined to make 2002 a pretty ugly one for the state. They
are as follows:

   When oil prices fell to the $18 a barrel range in late 2001 and early 2002, the
    extraction industry pulled back some, laying off about 1,000 workers between June
    2001 and June 2002.

   High natural gas prices, weak demand, and weak chemical prices hammered the
    chemical sector.

   Avaya Communications, Pennzoil Refinery, and Boeing Aircraft all shut down in
    Shreveport, laying off over 1,300 workers. Beaird Industries and Frymasters in the
    same city also engaged in significant layoffs.

   Fruit-of-the-Loom shuttered its St. Martinville plant at a cost of 1,300 jobs.

   The absence of expansion activity in the state’s huge chemical sector hurt industrial
    construction work. Construction employment fell by 6,200 jobs in 2002.

                      2003 to Mid-2005: Slow, Plodding Recovery

        Note back in Figure 12 that the Louisiana economy began to grow again, though
at a very modest rate. Non- farm employment rose only 0.5 percent in 2003. That was
much better than some neighboring states as seen in Table 4. Mississippi, Alabama, and
Arkansas all experienced employment declines one year longer than Louisiana, and their
overall decline was greater, except for Arkansas, whose decline matched that of

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                                Economic Outlook Page 22
Louisiana. Again, this fits the pattern of states that have a larger durable goods
dependency than Louisiana.

                                     Table 4
       Employme nt Declines in Louisiana, Mississippi, Alabama & Arkansas
                         During the Post-911 Recession

          State                    Years of Decline          % Decline in Employme nt
        Louisiana                     2001, 2002                       1.2%
        Mississippi                2001, 2002, 2003                    3.2%
         Alabama                   2001, 2002, 2003                    2.9%
        Arkansas                   2001, 2002, 2003                    1.2%

       Still, Louisiana’s recovery from the recessionary period was plodding at best. Not
only did employment rise only 0.5 percent in 2003, the state grew only 0.7 percent in
2004 and by August 2005 Louisiana’s non- farm employment was rising at only a 1.9
percent rate. What was the problem?

        By far the biggest culprit was the chemical industry. This sector had lost 5,900
since peaking in 1998, and much of that decline (4,500 jobs) had occurred since 2001.
The chemical industry was hammered by high natural gas prices. Retrenching in this
sector created problems in industrial construction and fabricated metal manufacturing as

        A second culprit was the extraction sector. In an almost remarkable reversal of
historical precedence, Louisiana’s extraction sector experienced almost no bump from
higher oil and natural gas prices---mainly due to a drag on the industry created by some
high-profile legacy lawsuits. Weakness in extraction also had a negative impact on the
fabricated metals sector and shipbuilding.

        With a pummeled chemical industry and a moribund extraction sector it was hard
for the feeder sectors---such as trade, services, and finance---to muster much growth.
The result was weak employment growth rates over 2003-05.

                           Into the Abyss: Katrina and Rita

        Unquestionably the most dramatic economic events in Louisiana’s economic
history occurred in August and September of 2005. Two highly destructive hurricanes hit
Louisiana. Hurricane Katrina tracked right over Plaquemines and St. Bernard Parishes
and on up the Louisiana-Mississippi border on August 29, 2005. Katrina was a category
4 hurricane when it made landfall, with maximum sustained winds of 143 mph and gusts
up to 165 mph. Hurricane Rita made landfall about a month later on September 24,
2005, coming in right on the Louisiana- Texas border. Rita was a category 3 hurricane
when it made landfall, with maximum sustained winds of 120 mph.

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                                Economic Outlook Page 23
        While the Lake Charles MSA sustained significant damage from Rita, the greatest
destructive force by far was leveled on the New Orleans MSA. When Katrina hit, the
levee system in New Orleans failed in several areas. The entire ninth ward on the east
side of New Orleans was flooded. The 17 th Street Canal was breeched sending flood
waters into sections of old Metairie and the Lakefront.

        Before these waters were pumped out, most of the impacted homes had sat in four
to ten feet of water for nine days to two weeks. Just as the ninth ward was pumped dry,
Hurricane Rita came along and caused a water surge that re-flooded that area. In
addition, the very low- lying parishes of Plaquemines and St. Bernard were swamped by
water surges, especially by Katrina. (For an interesting visual track of the collapse of the
levees and subsequent flooding see

       A combination of high winds and water surges made these two storms the most
destructive natural disasters in the modern history of the United States. Consider the
comparative data in Table 5 below which does not even include Rita:

                                          Table 5
                       Top Six Natural Disasters in the U.S. Since 1980

             Natural Disaster                               Costs
                  Katrina                               $200 billion +
            1988 Drought/Heat                            $61.6 billion
            1980 Drought/Heat                            $48.4 billion
            Hurricane Andrew                              $27 billion
           1993 Midwest Flood                            $26.7 billion
            Hurricane Charley                             $14 billion
Source: National Oceanographic and Atmospheric Administration

Impacts on Housing

Katrina and Rita’s impact on housing was particularly severe as seen in Table 6.
Numbers in the first two rows (destroyed/major damage) are homes rendered
uninhabitable. The National Association of Home Builders has estimated that seven
times more homes were rendered uninhabitable by Katrina alone than any other natural
disaster in U.S. history. Note in this table that housing damage was highly concentrated
in the New Orleans MSA. Almost 60 percent of the houses damaged in the New Orleans
MSA incurred major or severe damage.

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                                Economic Outlook Page 24
                                    Table 6
              Impacts of Katrina and Rita on Housing in Louisiana
     Impact          Statewide       New Orleans MSA        Lake Charles MSA
Minor Damage           210,512              122,446               38,427
Major Damage            98,086               79,068                6,673
Severe Damage          106,651              102,898                2,284
Total                  515,249              304,440               47,384
Percent with
Major or Severe        39.7%                59.8%                 18.9%
Source: FEMA, February 12, 2006.

Impact on the Offshore Oil and Gas Industry

       When a hurricane like Katrina is poised to enter this region of the GOM, energy
companies begin the process of shutting down the offshore platforms and evacuating
personnel. How many platforms are evacuated depends on the path of the storm.

       Figures 13 and 14 track the shut- in statistics for crude oil and natural gas
produced in the GOM. Shut- in oil and natural gas refers to output that was being
produced but is not now because of damaged platforms, pipelines or onshore receiving
units. In the case of Katrina, 95.2 percent of the crude oil and 88 percent of the natural
gas production was shut- in by August 30th . By September 9th , the shut- in rates had
dropped to about 56-58 percent for oil and about 33-37 percent for natural gas. Then the
improvement stabilized. When Rita appeared, because it made landfall further to the
west and more into the center of the GOM production region, 100 percent of crude and
80 percent of natural gas was shut- in. The last shut- in statistics released by the Minerals
Management Service show that 12.1 percent of oil and 9.3 percent of natural gas
production was still shut- in as of June 6, 2006.

        In the case of both of these storms, return to total production was steady but not
very swift. In fact, the shut- in rate for Katrina stabilized almost twice as high as was the
case for Hurricane Ivan last year. For exa mple, crude oil production after Ivan initially
stabilized at about 480,000 bd while the comparable figure for Katrina was closer to
850,000 bd.

        Why wasn’t crude and natural gas production immediately restored to their pre-
hurricane levels? Think of this production occurring in three primary zones---(1)
offshore platforms, (2) underwater pipelines, and (2) onshore receiving units. Each of
these suffered damages that needed repair before production could be restarted.

        Zone 1: Offshore platforms. One reason that production was not immediately
restored was because of damage to offshore platforms. As seen in Table 7, Hurricanes
Katrina and Rita---because they were stronger storms that hit more in the heart of the

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                                Economic Outlook Page 25
GOM production region---caused far more damage to these platforms than did Ivan
which hit farther east.

                                                                                Figure 13
                                                               Shut-in Oil Production in the Gulf of Mexico
                                                                                                                                               Shut-in Oil (bbl/d)

Source: Minerals Management Service

                                                            Figure 14
                                       Shut-In Natural Gas Production in the Gulf of Mexico

                                                                                                                                   Shut-in Gas (mmcf/d)*


Source: Minerals Management Service

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                                Economic Outlook Page 26
                                       Table 7
                           Impact on Offshore Platforms of
                          Hurricanes Ivan, Katrina, and Rita

      Impact                 Ivan              Katrina                Rita
     Destroyed                 7                 46                    69
     Damaged                  20                 20                    32
Source: Office of Electricity Delivery and Energy Reliability, U.S. Department of
Energy,, October 7, 2005, p.2.

       Of the platforms destroyed by Katrina and Rita, most were older platforms that
were built under pre-1988 upgraded design standards, and were located on the ―shelf‖
(shallow waters), where the wells were fairly depleted and producing little product. Still,
there were a number of the larger, deepwater platforms that suffered major damages. For
example, as a result of Katrina there were four deepwater platforms that accounted for
about 10 percent of offshore crude oil production that were severely damaged. Among
these were Mars, Ursa, Mansa, and West 143---all owned by Shell Oil Company. Mars
was restored to service in May 2006. Among the casualties of Rita was Chevron’s
Typhoon TLP (tension leg platform) which was turned upside down by the storm.

        Zone 2: Underwater pipelines. Damage to underwater pipelines was one of the
greatest concerns to the energy sector because checking and repairing these pipelines
requires some of the scarcest resources in the oil patch---divers, boats, and power.
Underwater mudslides caused by Ivan wiped out 102 pipeline systems. Katrina and Rita
knocked out 655 more, a total of 20,000 miles of pipelines.

        Zone 3: The onshore receiving units. Once the crude oil and natural gas reach
shore, these fuels are received by refineries, gas processing plants and onshore pipelines.
The first two sets were the most problematic. Katrina caused the closure of eight
refineries. Within two weeks after the storm passed, four of these had power restored
and were refining crude oil. Four others not only lost power but were also damaged and
were flooded. Three were in Louisiana: (1) the 350,000 bd ConocoPhillips Refinery; (2)
the 183,000 bd ExxonMobil Refinery, and the 122,000 bd Murphy Oil Refinery. These
three units were located in the heavily flooded areas of St. Bernard and Plaquemines
Parishes. All of the refineries were re-opened by summer 2006.

        Rita closed three other refineries in the Lake Charles MSA: (1) Citgo (324,000
bd); ConocoPhillips (239,400 bd), and (3) Calcasieu (30,000 bd). These three units had
mostly minor wind damage and power loss but fortunately, no flooding. They were all
three back up by November 2005.

       What has received little attention from the press was the damage to gas
processing plants in the region. Natural gas produced offshore tends to be high in
hydrogen sulfide and water. The processing plants refine these impurities out. Three
were located near the mouth of the Mississippi River and were severely damaged by both
wind and flood. Dynergy’s plant in Venice was so badly damaged that pipelines were

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                                Economic Outlook Page 27
being rerouted from it to other processing plants. Together these three plants process
about 2.8 bcfd of natural gas. Rita added another six plants to these three, though these
six were not as badly damaged as the Katrina victims. All of these plants are back in

Impact on Non-Farm Employme nt

        One is also struck by the impact of these two storms on non-farm employment in
the state. Back in Figure 12 we graphed the annual average employment levels in the
state. Because these storms hit in the latter part of 2005, their influence does not fully
show up until the 2006 numbers are shown. Employment experienced a total drop of 3.4
percent. Using these annual average figures, Louisiana lost 64,300 jobs as a result of
these storms, almost half of the 147,900 jobs lost during the 1982-87 period. The great
difference is that in the later case, the job loss occurred over a 6-year period. The two
hurricanes caused a loss half that size to occur virtually overnight.

       Even that last paragraph does not do justice to the employment blow Louisiana
endured as a result of Katrina and Rita. That is because the employment change
mentioned above was in terms of annual averages. The great Nobel Laureate in
Economics---Milton Friedman---once commented that some people do not understand
how a man six feet tall could drown crossing a river that was on the average only five feet
deep! Examining the monthly change in Louisiana’s employment reveals that the state‟s
employment fell from 1,941,100 in August 2005 to 1,776,000 in October 2005---a
huge decline of 165,100 jobs or 8.5 percent! A sharp recovery of jobs in the next 14
months helped bring the annual averages up smartly and hid just how deeply the job cut

                  Out of the Abyss: Recovery Post-Katrina and Rita

       Given the devastation meted out by Katrina and Rita the recovery of the state as a
whole from those two storms was in a sense quite remarkable. A quick glance back at
Figure 12 shows that on an annual average basis the state had recovered all jobs lost by
2007 plus 3,100 jobs.

         Largely this recovery was led by a huge construction boom. Massive amounts of
recovery monies were pumped into the Louisiana economy by both the federal
government and private insurance companies. Gulf Opportunity Zone (Go-Zone)
legislation was passed by Congress to further incentivize companies to make capital
expenditures in the affected regions. Go-Zone legislation provided either (1) an upfront
50 percent depreciation provision or (2) very low interest bonds for construction. A
rough count showed over $19 billion in construction projects in the New Orleans area and
$6.2 billion in the Baton Rouge MSA---figures that 8-10 times larger than in normal

       A second boost came to Louisiana’s oil and gas extraction sector. Very high oil
and natural gas prices pumped up the energy-dependent Lafayette and Houma MSAs. A

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                                Economic Outlook Page 28
couple of high-profile economic development wins---Union Tank Car in Alexandria and
Steelcase in Shreveport---gave a nice positive jolt to central and northwestern areas of the

        While 2007 was an exceptional year for Louisiana, with employment rising by 3.6
percent or 67,400 jobs, the state’s grow rate slowed noticeably this year. This is seen
clearly back in Figure 12, where the slope of the employment line slows considerably
from the pace of 2007. The slowing pace of recovery is also illustrated in Figure 15,
which plots monthly employment in Louisiana from January 2005 through July 2008.

                     Fig. 15: Louisiana Non-Farm Employment by Month



                                                              10/05 - 12/06:
                                                              +9,186 per mo.
                                                              1/07 - 12/07:
                                                              +4,067 per mo.
                                                              1/08 - 7/08:
              1800                                            +1,757 per mo.

                                      October, 2005:
                                    -165,100 Jobs (-8.5%)
                 2005             2006              2007                2008


        Note that after the tremendous decline of 165,100 jobs in only two months,
Louisiana enjoyed a very rapid recovery over the next 14 months, adding jobs at a rate of
9,186 per month. Then in 2007 this recovery rate slowed to 4,067 per month, and in
2008 the rate has slowed even further to 1,757 jobs per months. Such a recovery pattern
is not all that uncommon, as there is the initial influx of recovery dollars into the region,
an influx which tails off over time

       Will this slow-growth pattern continue into the future? That is the issue to which
we turn our attention next.

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                                Economic Outlook Page 29

      There are 64 parishes in Louisiana and the U.S. Bureau of Economic Analysis
(BEA) has taken 29 and separated them into eight metropolitan statistical areas
(MSAs). These parishes are all grouped around one or more major cities in the state.
Map 1 shows the location of each and the parishes that are in each MSA.

                  Map 1: Louisiana Metropolitan Statistical Areas

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                                Economic Outlook Page 30
                       The Eight MSAs: A Picture of Diversity

        One of the ―hot‖ words in modern lexicon is ―diversity‖. Homogeneity can
sometimes be problematic. If a business has all it eggs in one basket, and something goes
wrong with that basket, problems escalate exponentially. One thing can be said about
Louisiana’s economy. It is actually quite diverse. Each of Louisiana’s eight MSAs is
quite different, having its own unique economic base. These differences will impact our
forecasts for the different regions.

        Despite huge job losses from the storms, New Orleans remains the state’s largest
MSA with an estimated 525,000 non-farm jobs in 2008. This MSA was the hardest hit by
the hurricanes by far. New Orleans is big in shipbuilding, tourism, petrochemicals and is
headquarters for a number of extraction and extraction-related companies. It has
significant medical complexes and is home to several universities---the largest being the
University of New Orleans and Tulane University. The state’s only land-based casino is
located in New Orleans along with two other riverboat casinos.

        At the opposite end of the spectrum is Louisiana’s smallest MSA---Alexandria.
Located in the central part of the state, this MSA has about 65,500 non-farm jobs. It has
historically been the retail trade/service center for that region of the state with only a
small manufacturing sector. That is changing now with the opening of the Union Tank
Car and Roy O. Martin Lumber facilities in the region. Proctor and Gamble has
significant facilities in this MSA. Alexandria also has a strong military influence due to
nearby Fort Polk---perhaps the largest single employer in the state.

        Baton Rouge, with an estimated 374,900 non- farm jobs, is the home of two major
universities---LSU and Southern University---and is the location of the State Capitol,
which means government employment plays a major role in this MSA. This MSA also
has the largest concentration of chemical industry employment in the state and is home of
the country’s second largest refinery. The predominance of these two capital- intensive
industries means industrial construction supports proportionately more jobs in the Baton
Rouge area than in the other regions of the state. Baton Rouge is also the home of one of
the state’s two Fortune 500 firms---the Shaw Group, Inc.

         Lake Charles (92,900 non- farm jobs) like Baton Rouge, has an unusually heavy
chemical and refining base---the second most concentrated in Louisiana after Baton
Rouge. That means industrial construction is also important to this area. One way that
Lake Charles is very different from the state capital city is Lake Charles is home to the
state’s second largest casino market. There are five casino licenses in this MSA, though
it appears that number will fall by one. Too, a very large Indian casino is located only a
parish away. Aircraft maintenance and repair work at Chennault Airpark is also
significant in this MSA.

        The second smallest MSA in the state with 78,700 non- farm jobs is Monroe.
Finance plays a larger role in this MSA than in most because of the large Chase facility
there, and CenturyTel’s large operation make telecommunications an unusually large

____________________________________________________ __________________________________
                                Economic Outlook Page 31
component of its base. Paper and lumber industries are also an important component of
Monroe’s economic base. Its geographic position in the northeastern part of the state has
given it stronger ties to the agricultural sector than perhaps any of the other MSAs.

        Both the Houma (96,400 jobs) and Lafayette (151,500 jobs) MSAs have an
unusually high concentration of firms associated with the oil and gas extraction industry,
so fluctuations in energy prices powerfully impact these two regions. Though located
near each other, they still differ beyond their connections to oil and gas extraction.
Houma has a significant shipbuilding and fabrication sector---much of it closely tied to
the extraction industry. Lafayette, on the other hand, is home to the nation’s largest
jewelry settings manufacturer and has as a major employer, Acadian Ambulance, a
company whose helicopter ambulance service is used in several states.

         Finally, there is the third largest MSA in Louisiana, Shreveport-Bossier (181,400
jobs), a MSA that is unique in a couple of ways. First, Shreveport-Bossier is host to the
state’s largest and most successful casino market. Shreveport-Bossier also has the largest
durable goods manufacturing concentration in the state as well, anchored by the 1,900-
person General Motors facility. The huge 9,600-person Barksdale Air Force Base also
gives this community a significant military presence.

        In the sections below we will give a brief employment history of each of the
state’s eight MSAs, along with the Louisiana Econometric Model (LEM) forecast for
2008-09. In each MSA, we will explain the key factors and companies driving the
region’s future.

       The New Orleans MSA: Construction Big “+”; Space/Touris m Big “-“

        As mentioned above, New Orleans is the largest MSA in the state. Pre-Katrina,
its non- farm employment had peaked at 613,400 workers, nearly twice as large as the
second largest MSA---Baton Rouge. Located in ―the toe of the boot‖ (see Map 1), this
MSA is comprised of seven parishes--- Orleans, Plaquemine, Jefferson, St. Charles, St.
John the Baptist, St. Tammany, and St. Bernard.

History Pre-Katrina & Rita

        Figure 16 tracks the non- farm employment history in New Orleans from 1980
through 2008. New Orleans suffered mightily during the 1981-87 recession, losing
40,400 jobs or 8.3 percent of its workforce. This MSA had more extraction sector
employees than any other area in the state in 1981---20,600. By 1987, problems in the oil
patch had driven that figure down by nearly 30 percent to 14,600, as many firms
relocated their headquarters operations to Houston and employment in the industry in
general declined.

      New Orleans’ manufacturing sector also took a beating, falling from 61,300
workers in 1981 to 41,700 by 1987. Much of this decline occurred in the shipbuilding
segment of manufacturing which alone lost 6,900 jobs. Shipbuilding at the time was very

____________________________________________________ __________________________________
                                Economic Outlook Page 32
energy-focused with little diversity in its orders. Multiplier effects from these
shipbuilding layoffs dealt the MSA’s real estate, retail, services, and financial markets
punches that would have them floored until well into the 1990s.

         Like the other MSAs with strong energy ties---Houma and Lafayette---New
Orleans began a slow recovery in the late 1980s. Then, another round of layoffs at
Avondale Shipyards and the soft natural gas prices of 1991-92 flattened growth in 1992.
(This picture is distorted somewhat by the deletion in 1990 of St. James Parish
employment from the New Orleans MSA numbers.) A further blow occurred when the
Challenger accident caused a slowdown in flights of that spacecraft. This meant fewer
flights and fewer external fuel tanks to be built by what was then Martin Marrietta.

                  Fig. 16: New Orleans MSA Non-Farm Employment
              620                   1980-2008

              600                                               2002:
                                                            -10,300 jobs
              580                                             (-1.7%)


              540      -8.3%
                       Decline       X St. James removed

              480                                            -133,700 jobs
                1980     1985     1990         1995        2000        2005

        The big jump in 1994 and 1995 shown in Figure 16 should look familiar to
readers who carefully examine these same two years in the graphs of the other major
casino markets---Lake Charles and Shreveport/Bossier. Four rive rboat casinos with
about 3,300 workers opened during this time period. Secondly, the land-based casino
opened at a temporary site, and construction began on the massive permanent location at
the foot of Canal Street. This injection of new jobs was enough to generate healthy
annualized growth rates of 2.6 percent per year during 1994-95.

       New Orleans’ employment trend from 1999 to 2001 was virtually flat. Then, in
2001, employment in the region responded to the national recession and other events with
____________________________________________________ __________________________________
                                Economic Outlook Page 33
a one-year loss of 10,300 jobs, ranking it number five among the hardest hit MSAs in the
state by the national recession. Note in Figure 16 that the two years after the recession---
2003-04---were not particularly great recovery years. High natural gas prices led to the
closing of some ammonia fertilizer plants in the area and to general sluggishness in the
region’s large chemical industry. Employment rose at a moribund 0.5 percent rate a year.
An important fact from examining Figure 16 is for six straight years before Katrina
and Rita hit, employment in this MSA was virtually flat.

The Impact of Katrina & Rita

        Of course, the most profound message from Figure 16 is the impact of Hurricanes
Katrina and Rita on the MSA. On an annual average basis, Katrina and Rita caused
employment to fall by a remarkable 133,700 jobs or 21.8 pe rcent. These two storms
effectively drove New Orleans MSA’s employment back to levels it had not seen since
1977. Three decades of employment growth were wiped out overnight. According to
Figure 16, the New Orleans economy had recovered 44,400 of those jobs by 2008. At the
present time, employment in the MSA still remains lower than it was in 1980.

         Actually, the use of annual average data in Figure 16 does a poor job of
illustrating both (1) how badly these storms impacted the New Orleans economy and (2)
the nature of its recovery rate. In Figure 17 we trace monthly employment in New
Orleans from January 2005 through July 2008. Several important lessons can be gleaned
from Figure 17:

        First, on a monthly basis the job-destruction was much greater than suggested
by the annual average data. By the time Rita had re- flooded New Orleans the region had
lost 177,900 jobs, a remarkable 29.5 percent decline.

         Remarkable revision in job estimates. Secondly, a comparison of Figure 17
with a similar chart in last year’s Louisiana Economic Outlook will reveal that the job
loss was not as great as originally estimated. When the Department of Labor released its
first estimate of the post-storm job loss it was that 215,100 jobs had disappeared and that
through the end of 2006 very little recovery had taken place. The revisions that have
occurred in the data in the three years after the storm have been by far the largest
revisions we have seen in the three decades that we have been following the Louisiana

       What caused this huge revision? The DOL has a list of firms to survey to
generate their employment estimates. Two factors led to the large revision. First of all,
when the DOL called a firm and received no answer to the call, the agency assumed the
firm was closed and those jobs had vanished. In reality, in some cases the phone system
was simply still down. Secondly, many new firms came into the area to help with the
reconstruction work. They were not on DOL’s survey list. At the end of 2006 when
these firms filed their unemployment tax forms, all those missed employees were
discovered by the DOL, and the New Orleans region got a big boost to its reported
employment numbers.

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                                Economic Outlook Page 34
              Fig. 17: New Orleans MSA Non-Farm Employment by Month


                                                         1/07 - 7/08:

                                                        +1,268 per moth
              520             10.05 - 12/06:
                             +5,836 per month X



                       -177,900 jobs (29.5%)
                2005          2006              2007               2008

       Recovery rate still very slow. While the added jobs from the data revisions were
welcome news, the pattern in the recovery rate since the storm is definitely not. Note in
Figure 17 the recovery trends since employment bottomed out in October 2005. The
recovery looks like a ―kindergarten L‖. More frequently one would see a ―V‖ pattern in
employment right after a disaster as massive federal recovery and private insurance
monies flow into the area for the re-build effort. We see this ―V‖ pattern, for example
when observing the recovery in Lake Charles and Pascagoula, Mississippi.

       What is most disturbing about the recovery pattern in New Orleans is that it is
slowing down, not speeding up. From October 2005 to December 2006, the MSA was
adding jobs at a rate of 5,836 per month. Since then the recovery rate had slowed to
1,268 new jobs per month. That is not the textbook pattern of recovery one would hope

        Why the slow recovery? Why has the recovery rate been so slow? Few would
dispute that housing is the key factor. First, there is just the s heer size of the
destruction. There were almost 182,000 homes In the New Orleans MSA that incurred
either severe or major damage, i.e. damage bad enough to render the home uninhabitable.
Some have estimated this is seven times more homes destroyed than in any other natural
disaster in our country’s history.

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                                Economic Outlook Page 35
         Secondly, these homes were rendered uninhabitable by flood waters. When
flood waters enter a home, regular home owner’s insurance no longer applies. The owner
must have purchased national flood insurance. As it turns out, 74 percent of these
homeowners had no flood insurance. Those who did have flood insurance discovered
that it covered only 80 percent of the pre-flood value of the home up to a maximum of
$250,000. Virtually every home owner, even if they had flood insurance, was left with a
gap in their coverage.

        To cover this gap in coverage, the generous taxpayers in the other 48 states agreed
to send a pot of money to Louisiana and Mississippi to help homeowners bridge this gap-
--what is referred to in Louisiana as the ―Road Home ‖ monies. By mid-August 2008,
just over 119,000 checks had been written out of the Road Home monies for Louisianans.
Statewide there were nearly 205,000 homes rendered uninhabitable. Forty-two percent of
the homeowners have still received no Road Home monies.

        Once a homeowner in this MSA received a Road Home check he/she faced
serious challenges to returning to New Orleans. For example :

      Finding a contractor. Remember there were 182,000 homes in this MSA that
       require substantial work. Add to that the lengthy list of commercial and industrial
       projects that we listed back on pages 23-25. This means that (1) it will be
       difficult to find a contractor and (2) because of the high-demand market, the cost
       of getting the home repaired will be much higher than normal.

      Homeowne rs‟ insurance costs. Actuaries in insurance companies took note at
       the destruction from Katrina and Rita (and Ivan the year before) and adjusted
       insurance rates accordingly. Homeowner’s insurance premiums have doubled or
       tripled since the storms. It is not uncommon for the monthly premium on the
       insurance policy to be as large as the principle and interest payment on t he

      Rising utility costs. Both Entergy New Orleans and the New Orleans Sewerage
       and Water Board experienced widespread and serious damage to the electricity,
       natural gas, and water/sewerage infrastructure. Repair costs have to be spread
       across the rate payers, and there are fewer rate payers now. One report cites water
       rates rising by 43 percent. In addition to above ground power grid damage,
       Entergy New Orleans experienced problems in 534 miles of low pressure gas
       lines and 310 miles of high pressure gas lines. Roughly $626 million in damages
       were incurred. The company received $200 million from the Louisiana Recovery
       Authority and some funds from private insurers. A major funding gap remains
       that will have to be covered by far fewer users.

      Higher property taxes.        Property was reassessed just after Katrina by
       constitutional mandate. When the reassessments occurred, not surprisingly,
       assessed values rose---often a lot! It was not uncommon to find a home
       previously assessed at $750,000 to now be assessed at $1 million. The seven tax

____________________________________________________ __________________________________
                                Economic Outlook Page 36
       assessors in Orleans Parish had not estimated the fair market value of property in
       the parish on a systematic basis. The new assessment mandated a more
       systematic attempt to estimate the fair market value of the property. The City
       Council stepped in and aided homeowners by rolling back mileage rates so that
       the tax bill on a $1 million home dropped from $16,283 in 2007 to $11,940 in
       2008. In addition, the state and the citizens of New Orleans have changed from
       seven tax assessors to one for the entire parish. Property tax rates remain much
       higher than pre-storms due to the reassessments.

        Finally, consider three other issues. Recall from Figure 16 that in the six years
before the storms hit the economy in New Orleans was basically flat. Families that had
been dispersed by the storms to Dallas, Houston, San Antonio or even other parts of
Louisiana, typically found themselves in much more robust economies with more, and
higher-paying, jobs. Secondly, it is a fact that public schools in the New Orleans area
were among the worst in the state (if not the nation). Dispersed families also found
themselves in cities with much better public school systems. Finally, dispersed families
have been watching with alarm the crime situation in New Orleans, where 117 murders
occurred in the first seven months of 2007 and armed robberies were up 44 percent
during that period.

        Population data – Proble m is behind the levees. As a final indicator of the
difficulties Katrina and Rita wrought on New Orleans, consider the population data in
Table 8. Shown are the population change estimates by parish between July 2005 (pre-
storms) and July 2007, two years after the storms.

                                          Table 8
                  Population Estimates for New Orleans MSA by Parish:
                               July 2005 Versus July 2007
            Parish                  Absolute Change            Percent Change
          Jefferson                       -26,120                     -5.8%
           Orleans                       -214,602                   -47.3%
        Plaquemines                        -7,048                   -24.7%
         St. Bernard                      -44,857                   -69.3%
         St. Charles                        1,880                      3.7%
    St, John the Baptist                    2,082                      4.6%
        St. Tammany                         9,074                      4.2%
Source: U.S. Census Bureau

        In Table 8, the parishes behind the levees in this MSA are shown in italics and
were the ones that suffered the most from standing flood waters. The other three parishes
are located outside of the levees and were the recipie nts of many of those who relocated
after the storms.

       From a percent change standpoint, St. Bernard Parish has suffered the most, with
two-thirds of its population having still not returned. From an absolute change
standpoint, Orleans Parish has suffered the most, losing nearly 215,000 people. The loss

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                                Economic Outlook Page 37
in this parish was so great that it has lost its standing as the most populous parish in the
state for the first time in history. That title now belongs to East Baton Rouge Parish, one
of the largest final destinations for evacuees from the storms. The western most parish
behind the levees---Jefferson---has enjoyed the best recovery record, with its population
only about six percent below pre-storm levels. Jefferson has retained its status as the
second most populous parish in Louisiana.

Forecast for 2009-10

         Projections for this MSA are bounded by high levels of uncertainty, as one might
expect after natural disasters such as this area has suffered. The pattern of slowing
recovery in the region, depicted vividly back in Figure 17, has heavily influenced our
projections. We are not aware of any economic phenomenon that is likely to alter this
pattern. Unfortunately, we are aware of something that may even slow the recovery even

                  Fig. 18: New Orleans MSA Non-Farm Employment
              620                   Forecast: 2009-10




              540   -8.3%
                    Decline                     2009: +6,000 (1.1%)
                                                2010: +5,000 (0.9%)


              480                                             2005-06:
                                                            -133,700 jobs
                1980    1985      1990        1995        2000       2005        2010

        There is an old nursery rhyme that contains the line, ―When she was good, she
was really, really good. When she was bad, she was horrid.‖ That captures in a nutshell
the problems facing this MSA. There are some really, really good things happening
there, and there is a really, really bad thing on the horizon.

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                                Economic Outlook Page 38
        The next two years. Figure 18 illustrates our forecast for 2009 and 2010 for this
MSA. We are projecting New Orleans will add 6,000 jobs in 2009 and 5,000 in 2010.
For a region recovering from two horrific natural disasters these are unusually slow
projections---especially so for 2010. What is going on? There is really, really good news
coming from the construction sector, but really, really bad news looming in the region’s
manufacturing sector---specifically at Lockheed Martin Space Systems---and tourism.

The Really, Really Good News: Construction

        This region is in the midst of a remarkable period of construction activity.
Historically, a good year for the MSA would have been, say, $1 billion in construction
projects. We have counted approximately $20.3 billion in announced projects either
underway or announced for our forecast period. They include the following:

      Infrastructure Projects:
           o New six- lane twin span over Lake Ponchartrain: $806 million.
           o Widening of the Huey P. Long Bridge: $660 million.
           o Army Corps of Engineers levee improvements: $4 billion over four years.
           o Inner Harbor Navigational Canal surge-reduction project: $695 million.
           o Local road repair projects: $360 million over 5 years.
           o State & federal road projects: $545.9 million
                   Veterans Highway: $81 million
                   Airport Road to I10/I12/I59: $35 million
                   Caminada Bay Bridge: $35 million
                   I12 at Causeway: $31.5 million
           o Coastal restoration projects: $140 million
                   Caminada headland barrier: $30 million
                   Lake Ponchartrain hurricane protection: $50 million
                   West Bank hurricane protection: $50 million.
           o Recovery School District: $685 million capital program to rebuild/repair
              28 schools (presently funded portion part of $1.7 billion program).
           o St. Tammany capital improvements program: $167 million.

      Industrial projects:
          o Marathon Refinery expansion: $3.2 billion.
          o Valero Refinery expansion: $1.4 billion.
          o Entergy Little Gypsy retrofit: $1.55 billion.
          o Air Products hydrogen facility near Marathon Refinery: $200 million.
          o BioInnovation Center: $38 million.

      Repair projects:
          o Road Home monies of $7.5 billion (the largest part spent in the New
             Orleans MSA) to repair damaged homes.
          o Repair/renovation of Jackson Barracks: $460 million.
          o Repair of Fairmont Hotel to Waldorf Astoria: $100 million.
          o Repair of damage at Dillard University: $400 million.

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                                Economic Outlook Page 39
      New commercial:
         o Trump Tower – 450-room hotel plus condos: $200 million.
         o One River Place - 250-room apartment tower: $65 million.
         o Remake of World Trade Center: $160 million (developer backed out in
         o Dominion Group’s Crescent Club and Reserve: $100 million.
         o CP3 Associates – hotel/condos at Canal Place: $210 million (Go-Zone
             period has expired)
         o World War II Museum expansion: $300 million
         o $25 million renovation of Antoine’s Restaurant

         Some of the commercial projects are still at the planning stage and may not get
the full financing needed to start construction (the museum is not in this group), but even
absent those, the volume if construction projects is heady.

        There are other projects not listed above that involve both major construction
dollars and new jobs. One is the federal city. Under the base relocation and closure
(BRAC) actions of the Department of Defense, the Naval Support Activities 75-acre site
was to be closed on the West Bank. City officials are working towards getting control of
those assets and locating a number of federal operations there. An agreement has been
signed with the Navy and must be approved by Congress by September 30 th (after the
LEO has gone to press). Some 1,600 jobs will be retained there, including the Marine
Force Reserve Command. In mid-August, it was announced that the Sector New Orleans
Coast Guard Regional Headquarters will be relocated to the federal city from Kansas
City, bringing with it 300 new jobs and a $76 million capital investment (of a total of
$150 million to be spent initially) to start in 2009. In Phases II and III, another $350
million is to be spent at the site.

        A second major issue yet to be determined is the fate of Big Charity Hospital
and the Veterans Hospital. Big Charity---now University Hospital---was rendered
unusable after the hurricanes, at least according to some examiners. A large campus to
include both hospitals has been designed for downtown New Orleans, and funding for the
VA hospital has been secured, but financing the $1.2 billion for University Hospital
remains a difficult, and as yet unsolved, problem. The state is negotiating with FEMA
over $200 million in reimbursements due to damage caused by the hurricanes.

       Finally, there are discussions of major investments to the riverfront district,
the sports district, the theater district, in addition to the medical district. This
investment is meant to encourage private investments over time. Without including the
medical district the investment is projected to be $500 million.

The Really Bad News: Lockheed Martin Space Systems & Tourism

       While the construction sector will provide a major boost to the New Orleans MSA
over the next two years, much of this benefit will be offset by losses in two areas. The

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                                Economic Outlook Page 40
first is Lockheed Martin Space Systems. Lockheed constructs the external fuel tanks
for the Challenger spacecraft. Challenger’s flights end in 2010. As a result, Lockheed
will begin this October reducing its workforce from 1,900 now to 570 by 2010.
Lockheed has secured contracts to 23 upper stage rockets for the next manned lunar space
missions, but these projects will require far fewer employees than now work at the plant.
The state has invested $60 million in a ne w R&D facility at the site to help lure new
business and BolMar Yachts has located a plant on site that has 50 employees presently
with an eye towards growing by 100 more in 2009. Still, a net loss of 1,300 high-paying
jobs will be a blow to the MSA.

        The second shoe that will drop on New Orleans will be in its convention sector.
A successful operating rate at the convention center is at least 72 percent. Projections for
2010 and 2011 are 36 percent and 25 percent, respectively. Meetings planned for those
years were made in the 2005-06 timeframe, precisely when the city was under water or in
the early stages of recovery. These losses have serious implications for the MSA’s hotel,
restaurant, retail, cab, and services sectors. Other aspects of the tourism industry, such as
hotel conferences, special events, and other such activities will be forced to try to make
up for the lack of convention business---an unlikely scenario.

Mixed Message: Manufacturing & Other Sectors

         As one examines other manufacturing firms and other sectors of the New Orleans
economy the message is decidedly mixed. The region’s largest manufacturing employer-
--Northup Grumman Shipyards---is at 5,500 employees and is projected to remain
stable over 2009-10. NG received a new $2.4 billion contract for another amphibious
assault ship, a new $283.5 million contract for a Coast Guard Security Cutter, and
Congress apparently will fully fund its next large ship---LPD 26. The firm would
actually like to add to its workforce but has only been able to recruit enough welders and
pipe fitters to replace those lost by attrition.

        Textron Land & Marine has landed a $255 million bump in its contract to build
more armored security vehicles for the Army and is in the process of adding about 270 to
its labor force this year but not over our forecast period. Trinity Yachts has a thriving
business with 24 custom yachts under contract and employs 900 at its two yards in New
Orleans and Gulfport. We are not aware of any expected job additions at Trinity.

        While these three firms are relatively stable, a real positive for the MSA is the
addition of a new 400-job, $45 million Rooms-to-Go distribution center in St. Tammany
Parish. Monsanto Corporation is spending $196 million to add to its Roundup
production plant in Luling that will create 30 new jobs.

       Offsetting these gains will be the loss of the Gray & Company oil and gas
insurer to Hammond, Louisiana, and the movement of the Oreck headquarters to
Tennessee, costing New Orleans 60 high-wage jobs.

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                                Economic Outlook Page 41
       What our review shows is that aside from the construction sector, there appears to
be no other significant industry that will seriously boost the New Orleans economy over
the next two years and Lockheed and tourism will create a serious downward drag on the
region. That is what leads us to rather anemic growth prospects over 2009-10.

                Baton Rouge: Construction + Good Diversity = Solid Growth

        There are an estimated 374,900 jobs in this MSA, the second largest behind New
Orleans. It is the largest MSA in the state in terms of numbers of parishes---nine,
including East Baton Rouge, West Baton Rouge, Livingston, Ascension, Iberville, St.
Helena, Pointe Coupee, East Feliciana, and West Feliciana (see Map 1). In terms of
population, East Baton Rouge Parish (430,317) is the most populous in the state
according to census estimates for 2007.

Petroche micals, Construction, Universities & Government

        The petrochemical industry is a huge factor in this MSA’s economy.              This
MSA has the largest concentration of che mical industry activity in Louisiana. For
example, in 2002 there were 78 plants in the 9-parish area employing 11,789 workers
with an annual payroll of $811.5 million. 1 This sector is heavily concentrated in the three
parishes of East Baton Rouge, Ascension, and Iberville. Baton Rouge is home of the
nation’s second (and the world’s tenth) largest refinery---ExxonMobil---located just
north of the state capital building. Placid Refinery is also located in this MSA.

       Because the petrochemical industry is very capital- intensive, when it expands, so
does the industrial construction. Industrial construction jobs are also closely tied to
―turnarounds‖ at these plants, i.e., when the plants are shut down completely for
scheduled maintenance. The Baton Rouge MSA has an unusually high 11 percent of its
workforce in the construction sector, a proportion only slightly exceeded by Lake
Charles---site of another major chemical concentration.

       The Baton Rouge MSA also is the location of the State Capitol and the office
complex associated with it. Two major state universities---LSU and Southern
University---are located in Baton Rouge, along with one of Louisiana’s largest
community colleges.

Recent History of Baton Rouge

        Figure 19 shows employment trends in the Baton Rouge MSA over 1980-08. This
MSA was only mildly touched by the terrible recessionary years of 1982-87. Baton
Rouge dropped 4,800 jobs or 2.2 percent of its workforce as compared to the 9 percent
decline in the state as a whole over that same period.

       Note the distinct jump in the employment trend line in Figure 19 in 1990. This
was due to the addition of five more parishes to this MSA by the Department of Labor.
    U.S. Census Bureau, Geographic Area Series, Louisiana, Table 2, p.13.

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                                Economic Outlook Page 42
        The really good years. The years from 1988 to 2000 were heady ones in the
Baton Rouge MSA. This region had the most enviable growth record in the state in terms
of both size and consistency. The MSA immediately recovered the 1982-87 losses with a
banner year in 1988 when it gained 10,300 new jobs. Then the regio n’s employment
went straight up for 13 straight years over 1988-00, adding a robust average of 7,500 jobs
each time the calendar turned.

       The really weak years. The tables decidedly turned against Baton Rouge over
the next four years. This 9-parish MSA lost 3,900 jobs or 1.1 percent of its workforce in
2001 due to the national recession---an unusually short and mild dip compared to what
happened nationally. Its recovery from that dip was nothing like that of 1988. It took
three years to recover the jobs lost in 2001, and those three years were ones of very
modest growth as seen in Figure 19.

                    Fig. 19: Baton Rouge MSA Non-Farm Employment
                        Statewide                               2001:
                       Recession:                            -3,900 Jobs
              360        -9.0%                                 (-1.1%)
                       BTR: -2.2%
                       -4,800 Jobs

              280                                                 2005-06:
                    Five Parishes Added X                      The "Katrina Effect"
                                                                +18,500 jobs
              240                                                 (+5.4%)

                1980       1985      1990       1995        2000         2005
       The culprit behind this slow growth pattern was the chemical industry. We have
already pointed out the dominant role played by this industry in the MSA’s economy.
The chemical sector was hurt by two factors. Initially, the national recession hit sales in
this sector very hard and weakened considerably the price of chemical products.
However, the second factor was in many ways the most problematic. High natural gas
prices radically raised operating costs for these firms. Several chemical firms in the MSA

____________________________________________________ __________________________________
                                Economic Outlook Page 43
announced layoffs or closed either temporarily, partially, or completely. The region’s
ammonia fertilizer plants especially suffered.

The Katrina Effect

         Evacuees in. Baton Rouge is the closest large MSA to New Orleans, so it
initially absorbed a huge number of evacuees. From FEMA assistance applications, we
estimate that the Baton Rouge MSA initially absorbed about 248,386 evacuees.
Overnight, the MSA‟s population thus exploded by over 34 percent. Traffic came to
a standstill across the area, supplies vanished from grocery stores and gasoline stations,
and every rental unit in the area was absorbed. There was a wild real estate period of
about one month when realtors were selling more houses in a week than in the previous
year. The median price for a single family home leapt 27 percent, the largest jump among
the 151 MSAs surveyed by the National Association of Realtors. Sales tax collections in
East Baton Rouge Parish rose by 34 percent in September 2005.

        Evacuees out. There was, of course, no way for the MSA to permanently absorb
a quarter of a million people over such a short time span, if for no other reason than there
were not enough jobs available to support that many people. For example, in November
2005, the traffic count on I-12 east of the I-12/I-10 split was up 22 percent over August
2005. By 2007 that count was up only 3.1 percent. On the I-10 bridge over the
Mississippi, the count initially jumped by 26 percent, November over August. By 2007
that count was up only 2.9 percent.

       More importantly, the Census Department has made an estimate of the area’s
population as of July 2007. That estimate showed the MSA‟s 2007 population of
770,037 was up 39,921 over July 2005---a 5.5 percent increase. As seen in Table 9, the
bulk of that population increase occurred in East Baton Rouge (18,121), Ascension
(10,000) and Livingston (9,100) Parishes. The area clearly experienced an ―evacuees in
– evacuees out‖ phenomenon. A similar phenomenon was experienced in Hattiesburg,
Mississippi and Mobile, Alabama.

                                      Table 9
                            Population Change by Paris h
                               July 2005 – July 2007
                 Parish                   Absolute Change               Percent Change
          East Baton Rouge                      18,121                        4.4%
               Ascension                        10,000                       11.2%
              Livingston                         9,100                        8.5%
          West Baton Rouge                       1,091                        5.1%
             Pointe Coupee                        564                         2.6%
               St. Helena                         437                         4.3%
             East Feliciana                       276                         1.3%
                Iberville                         272                         0.8%
            West Feliciana                         60                         0.4%
Source: U.S. Census Bureau

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                                Economic Outlook Page 44
         Katrina boosted employment. Not only do the population numbers show that
this MSA benefited from the storms, the employment numbers shown in Figure 19
confirm that as well. The employment line in Figure 19 took a distinct upward turn in
2005 and 2006. The MSA’s employment rose by 18,500 jobs or 5.4 percent over this
period. (Note: This figure is almost 3,000 fewer jobs than the Department of Labor had
first estimated.) Obviously such a rapid growth pattern could not be sustained long run.

2007-08: Torrid at First, Then Slowe r

       As seen back in Figure 19, the Baton Rouge MSA managed to continue the post-
Katrina, torrid pace of adding 9,000-10,000 jobs a year. A massive amount of new
construction work began in 2007 and continues at this writing as we will document
below. The year 2008 has seen that growth rate chopped in half to about +4,400 new
jobs as some residual effects of the slowdown in the national economy have trickled
down to this region.

Forecast for 2009-10

       Figure 20 contains our forecast of employment for this MSA for the next two
years. We estimate that in 2009, the Baton Rouge region will add 6,500 jobs (+1.7
percent) and will follow that with an additional 6,700 jobs in 2010 (+1.8 pe rcent). In
percentage terms, this would make the Baton Rouge MSA the fourth fastest growing
MSA in the state, behind Houma, Lake Charles, and Lafayette. In absolute terms, its
growth will be the fastest in the state.

        What is behind this rather optimistic outlook for the Baton Rouge region? Part of
the answer lies in a still surging construction sector. However, unlike the New Orleans
MSA, Baton Rouge has some other things going for it that will be adding permanent jobs
in the future.

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                                Economic Outlook Page 45
                    Fig. 20: Baton Rouge MSA Non-Farm Employment
                                     Forecast: 2009-10
                       Statewide                           2001:
                      Recession:                        -3,900 Jobs
              360       -9.0%                             (-1.1%)
                      BTR: -2.2%
                      -4,800 Jobs

                                                          2009: +6,500 jobs (1.7%)
                Five Parishes Added X
                                                          2010: +6,700 jobs (1.8%)

                1980       1985      1990       1995       2000       2005      2010
Construction Projects: Now at $6.5 Billion

        In last year’s LEO we reported about $5.1 billion in construction projects either
announced or underway in the Baton Rouge MSA. Normally, a $500 million dollars year
would have been considered very good, so a factor of 10 higher was considered
spectacular. Some of those projects have since been completed, but there have been
enough new announcements that the value of underway/announced projects is now even
larger at $6.5 billion. They include the following:

             Industrial projects:
                 o Shintech expansion: $1.9 billion.
                 o ExxonMobil environmental upgrades: $554 million.
                 o Placid Refinery environmental upgrades: $300 million.
                 o Stupp Corporation expansion: $60 million and 200+ new jobs.
                 o Cemus LLC – new project at old Kaiser site: $280 million.
                 o Dynamic Fuels – new biofuels plant in Ascension Parish: $150 million.
                 o Coca Cola Bottling expansion: $178 million and 113 new jobs
                 o Pioneer Chemical: $142 million expansion.
                 o Formosa Plastics: $100 million expansion.
                 o Huntsman Corporation: $100 million expansion.
                 o Dupont: $66 million expansion.

____________________________________________________ __________________________________
                                Economic Outlook Page 46
           o Bercen Chemicals – new headquarters in Denham Springs: $5 million and
             20 new jobs at $90,000 annually.

      Infrastructure projects:
           o James Audubon Bridge in St. Francisville: $347.9 million.
           o State Highway projects over 2008-11: $524.9 million.
                  O’Neal Lane to Pete’s Highway overpass: $100 million.
                  I10/I12 split to Siegen: $84 million.
                  Mississippi River Bridge: $68 million.

      Commercial Projects:
         o Riverplace Hotel/Condos: $135 million.
         o City Plaza Tower II: $75 million (opens January 2009).
         o LSU Union renovation: $77 million.
         o LSU Baseball stadium: $37 million (opens spring 2009).
         o New Woman’s Hospital: $350 million.
         o Wampold’s renovation of Swaggart Dorm into hotel: $64 million.
         o North Oaks Hospital Diagnostic Center at Satsuma: $25 million.
         o Apartment Development Services: $70 million project at Howell Place
         o Our Lady of the Lake Children’s Hospital: $150 million.
         o Our Lady of the Lake expansion in Livingston: $50 million.
         o Mallard Crossing apartment complex: $20.2 million.
         o New Pinnacle Casino: $250 million.
         o Three new hotels are going up at Howell Place – Candlewood Suites,
           Springhill Suites, and a Microtel. No construction values were available.

      Special projects:
          o New Judicial Courthouse: $112.9 million.
          o New National Guard Armory on South LSU campus: $50 million.
          o Pennington – new clinical research facility: $50 million.
          o Mayor Holden’s $989 million bond proposal will be on the November 4 th

         In addition to these projects, a decision should be made soon on the huge R.W.
Day Film Project at I12 and O’Neal Lane. Day will spend $100 million on film studio
facilities, $110 million on infrastructure improvements, and a yet to be determined
amount on a mall and residential facilities. Day is working on the finalization of tax
increment financing (TIF) agreements with the state and East Baton Rouge Parish before
beginning work. Anticipated start date is early 2009.

New and Expanded Firms for the Baton Rouge MSA

       The good news is that in addition to the wealth of construction work, this region
continues to pick up other job-creating activities. These include the following:

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                                Economic Outlook Page 47
      The expansion by the Stupp Corporation, mentioned above, is expected to create
       over 200 new jobs.

      The Shaw Group has signed an agreement with the state to keep its headquarters
       in Baton Rouge and add 150 persons a year between now and 2018.

      Albermarle Corporation is moving its corporate headquarters from Richmond,
       Virginia to Baton Rouge, bringing with it 30 new jobs at an average of $200,000
       per year.

      Electronic Arts is partnering with LSU to bring 20 fulltime jobs and another 200
       jobs for LSU students and a payroll of $6 million.

      Directs General is opening a new center in Baton Rouge with a prospective
       workforce of 2,000.

      Staples Corporation is developing a new work-at-home operation in Baton
       Rouge that will employ 400+.

      Schroeder Williams Lumbe r Company is opening a new finger joist
       manufacturing facility in the area, creating 40 new jobs.

      Sunland Fabricators is expanding its facility and adding 100+ jobs.

      Superior Homes is constructing a $3 million plant in Clinton that will employ up
       to 150 workers.

        In addition to these ―known quantities‖, we are aware of three other significant
projects that could come to fruition soon. The Baton Rouge Area Chamber is very close
on two new headquarters for the area which combined could create nearly 300 new
jobs. Thirdly, owners of the recently closed Te mbec paper mill are very close to an
agreement to sell the plant to an unnamed suitor. The new firm would produce a very
different product than Tembec but would still hire about 200 employees.

       It is clear from this quick review that the Baton Rouge MSA has a bright future
ahead over 2009-10.

                       Shreveport/Bossier: Uncertainty Cubed

        The Shreveport-Bossier MSA is the third largest MSA in Louisiana with an
estimated 181,400 non-farm jobs in 2008. Located in the northwestern corner of the
state, this MSA is now comprised of three parishes---Caddo, Bossier, and DeSoto.
Webster Parish has been dropped from this MSA.

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                                Economic Outlook Page 48
       This MSA has the highest concentration of durable goods manufacturing
employment in the state, and that tends to make the area much more susceptible to
national recessions than Louisiana’s other seven MSAs. Among the large durable goods
manufacturers in the area are General Motors (the only auto manufacturer in Louisiana),
Beaird Industries (a producer of wind towers), CellXion (a manufacturer of cellular
towers), Frymasters (manufacturer of deep fryers and similar products for McDonalds
and KFC), and the new Steelscape, a steel components manufacturer.

       Shreveport/Bossier is also home of the state’s largest and most successful casino
market. This MSA now has five large river boat casinos with 7,942 employees at the
end of 2004. These figures do not include the 800+ employees at the Louisiana Downs
Racino, now owned by Harrahs. Bossier City is home for the 9,600-person Barksdale
Air Force Base, an important economic driver for the area. Another big employer in the
MSA is the LSU Health Sciences Center with 5,260 employees.

Shreveport/Bossier Recent Employme nt History

        Figure 21 tracks the employment history of this MSA over 1980-2008. The
Shreveport/Bossier area suffered through a prolonged, and deep, recessionary period
from 1985-89. (The decline in 1990 was due to the substitution of DeSoto Parish for
Webster Parish.) While this decline was partially a result of a badly declining exploration
industry, that was not the main culprit.

        1985-89: The AT&T effect. Both the depth and length (this MSA was the last in
the state to begin the recovery process) of the recession was due to one firm. AT&T had
a large phone equipment manufacturing facility in Shreveport that employed 7,450
people at its peak in 1984. The firm then began a major downsizing effort that ultimately
dropped its employment to near 1,100. Those layoffs, combined with their negative
multiplier effects, caused the MSA’s employment to decline by 8.2 percent.

        Casinos to the rescue. In 1990, the Shreveport/Bossier area began a slow assent
from the depths of its recession. Initially, job growth was positive, but anemic. Then in
1994, its employment began to rise rapidly---by an average of 4,600 jobs a year. The
source was riverboat casinos. These casinos have been among the most successful in
the state, because they have drawn heavily from the huge Dallas-Ft. Worth metroplex for
their customers.

        Casinos added jobs to the region in another important way as well--- the
construction of large hotels. Horseshoe Casino had a 25-story, 606-suite hotel; Casino
Magic operated a 94-room, 94-suite hotel; and Isle of Capri operated a 300-suite hotel.
These, of course, are pretty labor- intensive operations, so the MSA picked up a
significant employment boost here as well.

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                                Economic Outlook Page 49
               Fig. 21: Shreveport-Bossier MSA Non-Farm Employment
                                                              3,900 Jobs
              180                                               (-2.3%)

                                     1994-96 &

              160                     Casino


              140           -8.2%
                                     X 1990: Desoto added; Webster dropped
                1980   1985       1990        1995         2000        2005

        Durable goods dependence & national recessions. The years 2001-03 were
particularly difficult ones for this MSA. The MSA lost 3,900 jobs over this three- year
period or 2.3% of its workforce. In percentage terms and in length, it was the worst
decline in the state, not unexpected in a very durable goods-dependent region.

        Several factors played a role in this rather poor record. First, there was the
closure of some large manufacturing facilities in the area. In mid-2001, the Avaya
Communications (formerly, Lucent Technologies) closed its Shreveport plant, costing
the area 900 jobs. The Pennzoil Refinery was sold and dramatically cut back from 230
workers to only 85. Boeing closed its facility at the airport, laying off 162. Precision
Response closed its 250-person call center in early 2001. General Electric began the
process of transferring 400 positions at its industrial systems plant to another site in
Monterrey, Mexico. These were permanent layoffs.

        Too, the state’s most successful casino market took a hit as business declined
with the recession. The area’s newest casino, Hollywood, reduced its workforce from
2,200 to 1,800. Three of the area’s five casinos reduced employment due to the recession.
Finally, a mixture of other firms, including Frymasters, Beaird, and Exide
Technologies imposed significant layoffs in 2002. Beaird, in particular, went from a
700- to a 30-person workforce.

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                                Economic Outlook Page 50
        GM, Beaird, and Frymasters stop the fall. The Shreveport/Bossier MSA
turned the corner in 2004 and has grown for five years in a row, expanding at an average
rate of 2 percent a year over 2004-08. Initially, General Motors was a key player in this
recovery. GM opened its new facility and hired 600 additional workers to begin test-
building of the Hummer 3 at its old site. Its employment in the region jumped from about
2,400 to 3,600. However, a round of employee buyouts in 2007 dropped employment at
this plant back down to 2,153.

        Too, after taking over Beaird Manufacturing, the Eakin Company initially put
that firm back on an expansion path. Employment at the location jumped from 30 to
about 570.

        Frymasters came back at an all-time high employment level of over 600
employees. Too, the new firm Steelscape---a steel components manufacturer---opened at
the Port of Bossier, creating 240 new jobs in 2007.

        A Wild 2008. 2008 has been a wild year for this MSA. As we have written
repeatedly, the Shreveport-Bossier MSA is the most sensitive region of the state to
national economic conditions. A combination of a slowing U.S. economy and $4 a
gallon gasoline delivered a head shot to the GM plant this year. Even before energy
prices had peaked the plant had laid off 113 workers in the February-March timeframe.
Gasoline at $4 a gallon caused demand for the plant’s pickups---especially the gas-
hungry Hummer HT3---to plummet so far that an entire shift was furloughed, costing the
area another 760 jobs.

        Unfortunately, market conditions turned against Beaird Industries in 2008, and it
was closed. The firm has been purchased by a Korean firm—Speco Company---which
plans to reopen the firm soon. A weak U.S. housing market led to the closure of the
Georgia Pacific plywood plant in DeSoto Parish (-280 jobs), and the firm laid off 400 at
its plant in Springhill.

        You would think those blows would have the area in a real emotional funk. That
would indeed be the case were it not for the Haynesville Shale. This is a huge new
natural gas find in the northwestern part of the state that by some estimates contains 20
tcf of natural gas, making it almost as large as the massive Barnett Shale in northeastern
Texas. It has given the Shreveport-Bossier region the air of a gold- mining town during
the gold rush days.

         The Haynesville Shale is what is called a ―resource play‖ meaning the probability
of drilling a successful well is very high. That in turn means the exploration companies
are willing to pay landowners large upfront lease payments for the right to drill on the
land. Lease payments in the $5,000-$10,000 per acre range are common. The play starts
with high production in the first years, then drops down to a new level where it stays for
about 15 years. It is a predictability that analysts love, and makes them want to part with
lots of investment dollars to explore the shale. Rig counts in this part of the state

____________________________________________________ __________________________________
                                Economic Outlook Page 51
typically settle in the 40s range. Most experts think it will be at 100 by the end of 2008.
The money being pumped into the economy via drilling activity and lease payments
seems to be more than offsetting the gloom produced by GM, Beaird, and Georgia

Shreveport/Bossier Forecast for 2009-10

        Figure 22 shows our employment forecast for this MSA over the next two years.
We are projecting that the Shreveport/Bossier MSA will add 2,500 jobs in 2009 and
3,000 jobs in 2010. The rather weak 2009 number is caused by the averaging over into
the year of the large layoffs at GM.

        Readers should know that the uncertainties about this MSA’s future are greater
than any of the other seven in the state---hence our headline about this section –
―Uncertainty Cubed‖. Resolution of these uncertainties could cause our forecasts to turn
out to be wildly too pessimistic.

        One uncertainty that involves a lot of jobs is the future of GM.    The firm is
closing one shift and laying off 760 people as a result. What happens if gasoline prices
drop down to the $3 a gallon range and the economy recovers in the second half of 2009
as Moody’s Economy.Com suggests? Will the 760 people be rehired? Too, Pilgrim‟s
Pride has announced the closure of its 270-person chicken processing plant in Bossier
Parish effective October 10, 2008.

        The Haynesville Shale presents another significant uncertainty. Will this play be
even more successful than projected? Will the rigs count go above 100 to perhaps 200
rigs? Beaird Industries has been purchased by Speco of Korea. How successful will
this company be in adding back the 400 employees that were laid off there this year.

         The region’s largest employer---Barksdale AFB---has enormous potential to add
permanent jobs and temporary construction jobs. About the time this year’s LEO is
released the Air Force will decide between Barksdale AFB and Arnold AFB in Tennessee
for the location of the Common Battlefield Airman Training program (CBAT).
CBAT would bring 14,000 airmen a year through Barksdale to be trained and would
involve adding about 800+ jobs at Barksdale. A large number of new buildings would
have to be erected, giving a boost to the construction sector in the MSA. Barksdale is
working with the Air Force and the Army to potentially use nearby Camp Minden’s
facilities to help lower costs of the project and give Barksdale an edge over Arnold.
CBAT would mean a lot of new economic activity for the area.

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                                Economic Outlook Page 52
               Fig. 22: Shreveport-Bossier MSA Non-Farm Employment
                               Forecast: 2009-10

              180                                       -3,900 Jobs


                                                            2009: +2,500 (+1.4%)
                                                            2010: +3,000 (+1.6%)
                                             % Durables:
              140           -8.2%            US:    6.4%
                           (AT&T)            Shrev: 8.2%
                                             LA:   4.6%
                1980   1985      1990       1995        2000        2005       2010

        A second uncertainty at Barksdale involves the future of the Cyberspace
Command. The Secretary of the Air Force has asked the 8 th Air Force Commander to
plan for this new command. The state is spending $100 million to build a Cyber
Innovation Center to lure many of the private contractors to the area to support the
command. The decision on Cyberspace is being delayed at this writing due to a change
in leadership within the Air Force. Even if Barksdale does not get the full command, it is
likely to get a piece of the civilian contractor business at the Innovation Center. A
potential of several thousand high- wage jobs are at stake in these decisions.

        Barksdale AFB will be a sure source of new jobs over the forecast period even if
CBAT and Cyberspace do not work out. We have written in earlier editions of the LEO
about the Air Force’s decision to reduce the B52 fleet by 18 planes. That reduction is
now taking place with the lost planes evenly split between Barksdale and Minot in North
Dakota. Initially, it was believed this would cost the base about 350 jobs. However, in
an odd twist of events, Barksdale will actually gain 500 jobs due to training efforts of
the 2nd Bombe r Wing and the 917th Bomber Wing being assigned to the base. In
addition, Barksdale will gain another 300 jobs when ne w nuclear training functions
are opened at the base later this year.

       In addition to this positive new at Barksdale, there are other positive events that
will boost the area’s economy over 2009-10. Specifically, Willis Knighton Hospital

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                                Economic Outlook Page 53
will be spending $200 million on an addition to its Live Oaks Retirement complex. Over
the next 4 years the state will be spending nearly $400 million on road projects in the
MSA, including $216.7 million on I49 projects and $35 million on the Westerfield to
Industrial Road.

       A final uncertainty that could very positively impact this region’s economy must
remain clouded in a bit of mystery. The local chamber of commerce is working with the
Louisiana Department of Economic Development on landing the project with the code
name Lynx. Shreveport is on the short list with one other city to land this large
manufacturer, which could create up to 600 high-paying jobs.

             Lafayette: Construction & Energy Boom + More Diversity

       The Lafayette MSA, located in south-central Louisiana (see Map 1), is now
composed of only two parishes---Lafayette, and St. Martin Parishes. St. Landry and
Acadia Parishes were dropped from this MSA in 1990.

        A key to understanding this region’s economy is its geographic location. Located
in an oil-rich area and not far from the coast, Lafayette became a prime spot to locate
service firms, fabricators, and other companies that do business with extraction firms
exploring South Louisiana and in the Gulf of Mexico. Consequently, like Houma, the
Lafayette MSA is closely tied to all aspects of the oil and gas exploration industry.

        The MSA derives 11 percent of its jobs (16,700 in June 2008) directly from the
exploration industry, the highest concentration among the state’s eight MSAs (the
comparable number for Houma is 7.1 percent). Countless other jobs in the MSA are tied
to the extraction industry through the multiplier effect.

         Stuller Settings is a break from this pattern. This 1,350-person facility is the
nation’s largest jewelry settings manufacturer. Until the mid-90s this area also hosted the
largest manufacturing employer in the state---Fruit-of-the-Loom---which had a huge
facility near St. Martinville. Acadian Ambulance is another large employer in the area
(550 jobs in the area, 2,300 in Louisiana) whose ties are not directly related to the
extraction industry, although the firm provides air- med helicopter services to the

Recent History of Lafayette

        Figure 23 displays the recent employment history in Lafayette and demonstrates
vividly the close ties this MSA has to the extraction industry. When oil prices
plummeted in the early 80s, so did the Lafayette economy. Nearly a fifth of the MSA’s
jobs disappeared over 1982-87. It was the worst downturn in Lafayette’s recorded
history. However, unlike similarly extraction-dependent Houma---which took 10 years to
recover its losses from that recession---Lafayette came out of its ―V‖ much quicker.

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                                Economic Outlook Page 54
         The key was diversification. In the late 1980s, the previously mentioned Fruit-
of-the-Loom constructed very large facilities in the area and in a short period of time
became the state’s largest manufacturing employer. By 1994, Lafayette had recovered all
its lost jobs and began setting new employment records. (This does not show up clearly
in Figure 23 because of the adjustment in the makeup of the MSA in 1990.)

                    Fig. 23: Lafayette MSA Non-Farm Employment

                                                              Late 2001:
                                                              Closure of
              140                                              F-O-L

                                      1992:            -4,300 Jobs
              120                     Soft gas
              110      -19.4%
                                     X Acadia & St. Landry Dropped
                1980    1985      1990         1995        2000        2005

       Soft gas prices in 1992 set Lafayette back a bit, but like Houma, the hit was
nothing like the 1982-87 period. Surging employment at Fruit-of-the- Loom pushed
employment up briskly for the next couple of years.

        Then Lafayette entered a ―bad news- good news‖ period. The bad news? As a
result of the North American Free Trade Agreement, Fruit-of-the-Loom began a round of
massive layoffs. The good news? Layoffs at Fruit-of-the- Loom coincided almost exactly
with two important events. One was a jump in oil and gas prices that sent the exploration
industry on a hiring binge. The other was a new entrant that both diversified the
economy even more and was labor- intensive to boot---Stuller Settings. Stuller hired
enough employees that it became the largest jewelry settings manufacturer in the U.S.
Lafayette employment expanded right through the Fruit-of-the-Loom layoffs.

____________________________________________________ __________________________________
                                Economic Outlook Page 55
       The year 1999 was a bad one for Lafayette. Oil prices fell to under $10 a barrel
and that sent the extraction industry into the layoff mode again. Forty-three hundred jobs
disappeared from the MSA (see the decline for 1999 shown in Figure 23).

        For the next two years, Lafayette was back in the growth mode, setting new
employment records in 2001 when most other MSAs in the state were being depressed by
the national recession. Help in this recovery came from two sectors. Several significant
distribution centers, including the large Walmart distribution center near Opelousas and
Magnolia Distribution Cente r in Lafayette, opened during this period. Then in 2001,
the MSA attracted the Cingular Wireless‟ call center, which hired 1,200 employees.

        Unfortunately, Lafayette experienced a big blow in November 2001 when Fruit-
of-the-Loom’s Martin Mills plant was shuttered, laying off 1,300. By this time, the
national recession was also impacting Stuller Settings, which laid off about 175
employees. In 2003, Devon Energy transferred 60 employees out of Lafayette, and
Fle ming Company---a wholesaler supplying the troubled K-Mart---closed its
distribution center there as well. The combination of these events, coupled with a
lackluster response of the extraction industry to high energy prices, kept this MSA in a
funk (-2,500 jobs) for three straight years.

The Impact of Katrina & Rita

       It is obvious from examining the 2005 and 2006 data points in Figure 23 that
something special happened in this MSA in those two years. Non- farm employment
spiked upward by 10,800 jobs or 8.2 percent over those two years. What caused this nice
rebound in employment in Lafayette?

        One factor was resurgence in the oil patch. The rig count rose from about 165
to over 201, which meant (1) new exploration jobs, (2) new exploration servicing jobs,
and (3) new oilfield-fabrication-associated jobs for the Lafayette area.

        Indirect energy effects. But a larger factor by far was the impacts of Katrina and
Rita. These two storms impacted the Lafayette area in two broad ways. First, there were
the spillover effects of the destruction of the offshore energy infrastructure. Both Katrina
and Rita were very destructive to the energy infrastructure in the Gulf of Mexico. A
total of 115 offshore platforms were destroyed and another 52 were damaged by the two
storms. Underwater pipeline systems were also damaged. Lafayette is the home to
several fabricators and oilfield service firms that garnered some of the repair work on
these facilities.

       Evacuee effects. Secondly, Lafayette became a home to many evacuees after the
storms---about 34,336 by one estimate. Evidence from the Census Bureau suggests that
Lafayette has experienced the same population adjustment as Baton Rouge except on a
smaller scale. Census data indicate that between July 2005 and July 2007, the Lafayette
MSA population increased by 9,033---a heady 3.7 percent increase in only two years.

____________________________________________________ __________________________________
                                Economic Outlook Page 56
2007-08: Slowe r but Still Healthy

        Data indicate that the employment growth rate has slowed from about 5,400 jobs
a year in the previous two years to a slower 3,750 jobs a year over 2007-08. Still, this
represents a still very healthy growth rate of 2.6 percent a year---second only to Houma
among the state’s eight MSAs.

        This slowdown is largely due to the completion of much of the Gulf of Mexico
rebuild effort, but also, Morton Salt closed its 197-person facility at Weeks Island in
2007, one of the few bits of negative news coming out of this region.

        Growth in 2007-08 has certainly been spurred by a very robust oil patch as oil
prices reached record levels in 2008 and natural gas prices were unusually high as well.
Too, the Nucomm call center came to Lafayette in 2007 adding 500 new jobs, and
Acadian Ambulance built a $15 million expansion that led to 300 more jobs.

Forecast for 2008 and 2009

       Figure 24 provides the reader with our projections for employment for this region
over the next two years. We are forecasting growth rates of about two percent
annually in these two years with 3,000 ne w jobs in 2009 and an additional 3,100 new
jobs in 2010. Only the Houma MSA is expected to exceed this growth rate over 2009-
10, making Lafayette the second fastest growing MSA in Louisiana.

        By far the most important foundation for this fine outlook is fundamental strength
in the oil and gas extraction sector. Unusually high energy prices combined with the
new discovery of the lowe r te rtiary trend in the Gulf of Mexico means business for this
region’s extraction firms, fabricators, and drilling service firms should be very robust.
The discovery of the lower tertiary trend is particularly important, since prior to this find
there was concern that the Gulf of Mexico was becoming mature and fully explored and
that business was about to start tailing off in Lafayette. Few are concerned about that
probability now.

       In addition to the extraction and extraction-related work, this area is also looking
at a very hearty construction boom over the next two years. Among the projects that
have come to our attention are the following:

      $110.4 million in bonds have now been sold by Lafayette Utility Services so it
       can begin installation of its new fiber optics network.

      Lourdes Hospital is about to begin construction on a new $200 million project.
       Ground-breaking is scheduled for late 2008 or early 2009.

      $40 million in construction work is planned at the University of Louisiana at

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                                Economic Outlook Page 57
      There are $94.4 million in state road projects planned for this two-parish region,
       including $36.5 million for Verot School Road and $20 million for the Pinhook to
       Broussard corridor.

      Place de Lafayette is a set of two, six-story office buildings at a cost of $10

      The Acadiana Arts Council is planning a $15 million, 300-seat performing arts

      Women‟s and Children‟s Hospital is completing a $14 million expansion and is
       planning a $13 million expansion of its third floor to start in 2009.

      Lafayette General Hospital is completing a $19 million expansion and is
       considering a 3-5 year $50 million renovation program.

      Plans are to spend $8 million on a new Louisiana Technical College campus.

      Bids are going out later in 2008 for the construction of a 40,000 square foot
       multimodal building in downtown Lafayette that will cost $14.4 million.

      Lafayette Regional Airport is undergoing a $31.7 million expansion that will
       produce a new parking lot and new jet ramps.

        The good news is that there are other additions coming to the Lafayette area that
are adding some diversification away from the region’s high level of extraction-
dependency. For example, Flight Safety Inte rnational is building a new $120 million
flight simulator facility in Lafayette that will add about 100 jobs at $60,000 per job.
NuComm‟s Call Center‟s employment is at 500 and the firm hopes to double that
number over our forecast period.

        System Built Homes, located at the old Fruit-of-the-Loom facility is now at 100
employees. SBH has several firms lined up to join them at the site in producing modular
homes, adding up to 200 more jobs over 2009-10. A smaller firm, Oil Warriors, is
already located at the site with 10 employees. Prime Marine is planning a new $5
million facility in the region with 72 new jobs.

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                                Economic Outlook Page 58
                       Fig. 24: Lafayette MSA Non-Farm Employment
                                     Forecast: 2009-10
                                                           2009: 3,000 jobs (+2.0%)
                                                           2010: 3,100 jobs (+2.0%)




              100         Decline
                                           X Acadia & St. Landry Dropped

                1980         1985        1990        1995         2000        2005        2010

        Two of this region’s large stalwarts---Stuller Settings and Acadian Ambulance-
--continue to provide many jobs in the MSA and are expecting modest growth in
employment over the next two years. Stuller recently had their site license renewed with
the DeBeers Diamond cartel. Spikes in gold and platinum prices have worked to soften
the market for Stuller’s setting, but the weakening value of the dollar has helped their
market by reducing imports of setting from foreign setting manufacturers. Now at 1,350
employees, Stuller may add about 60 new workers over 2009-10.

        Acadian Ambulance has about 550 employees in the Lafayette area and about
2,300 statewide. The firm is expecting its employment to rise by 3-4 percent per year
over the next two years, with good growth projected in Acadian’s alarm monitoring and
tele-healthcare segments.

              All in all, it looks like a very promising future for this region of the state.

                      Houma: Reaping the Rewards from High Energy Prices

        The Houma MSA is composed of two parishes---Lafourche and Terrebonne---and
this is one of the MSAs whose composition did not change when the Census Bureau
generated new MSA designations. Located in the southern coastal area of the state (see

____________________________________________________ __________________________________
                                Economic Outlook Page 59
Map 1), Houma is highly dependent on the oil and gas extraction industry and the
spillover sectors---machinery, fabrication, shipbuilding, water-borne transportation---that
feed off of extraction activities. In June 2008, 7.1 percent of the MSA’s employment was
directly in oil and gas extraction, as compared to a statewide ave rage of only 2.7 percent.

Houma‟s Recent History

        Figure 25 tracks the non-farm employment history of this MSA over 1980-2008.
What strikes an observer most in this graph is the unusually wild fluctuations in the
region’s employment over time. Because of its heavy dependency on the extraction
industry (the second heaviest of any MSA, behind Lafayette), wild fluctuations in energy
prices over the past 30 years have dramatically impacted Houma. The influence of
energy prices can be seen in the big ―V‖ and the little ―Vs‖ shown in this graph.

       The BOOM years. The first, and biggest, ―V‖ occurred after one of the greatest
bull runs for any MSA in Louisiana history. From 1975-81, this MSA enjoyed a
remarkable period of growth in response to oil prices that peaked at $37.50 a barrel for
Louisiana crude in 1981. That would be about $90 a barrel in today’s prices.

         The BUST years. A big ―V‖---covering the period from 1981-91---followed this
boom period. The marked decline in oil and gas prices between 1982 and 87 sent this
region into a free- fall. Some 17,200 jobs or nearly a quarter of the workforce vanished.
Car dealerships, restaurants, banks, and any retail establishment suffered through a
terrible period as the MSA shed a quarter of its jobs. Houma was the worst hit MSA in
the state by this recession. It took a decade for Houma to recover all the jobs lost during
this dramatic downturn.

        The long road back. When oil and gas prices recovered somewhat from 1987-
91, this metro area rose up the other side of the ―V‖. Exploration activity in Louisiana
has been moving southward across the state since the 1950s, indeed, heading further and
further offshore in the Gulf. Houma’s geographic location on the coast made it the ideal
site from which to launch offshore exploration.

         The little “Vs”. Still, every time energy prices got soft, Houma’s employment
declined. The MSA lost 1,500 jobs in 1992 when natural gas prices declined as a result
of two straight unusually warm winters, and it lost 3,100 jobs in 1999 due to low oil
prices. Interestingly, Houma went through the post-911 U.S. recession unscathed. In
fact, the MSA picked up 5,000 new jobs over 2001-02 when most of the other regions of
the state were in absolute decline.

        Note in Figure 25 that the ―Vs‖ have been getting shallower and shallower. This
is primarily because the extraction industry is running much leaner now and has learned
not to respond too strongly to rising energy prices. The firms that lend money to
extraction firms have learned the same lesson.

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                                Economic Outlook Page 60
        Still it is important to note in Figure 25 that there has always been a left side to
the “V”. That is, after energy prices have remained high for an extended period, the
extraction industry has always responded by returning to the oil patc h to take advantage
of the higher prices. At least that was true until 2004. Response to the recent run up in
oil and natural gas prices was more tepid than expected in 2004, with little change in the
rig count. In fact, Houma was the worst performing MSA in Louisiana in that year.

                       Fig. 25: Houma MSA Non-Farm Employment



                        -24.6% 1997: New Record
                        Decline   (10 Years)    X
               70                                           Soft Oil

                                         Soft gas
               50                        Prices
                1980     1985       1990         1995         2000         2005
        Legacy laws uit effects. We believe this poor response resulted from industry
fears generated by recent ―legacy‖ cases, in particular the Corbello case. In the time
since the Corbello case, the industry has been lobbying hard for tort reforms to correct
their perception of abuses arising out of the Corbello case. A degree of success has been
achieved. One of the factors that made the Corbello case so onerous to the industry was
that much of the settlement was based on allegations that drilling had impaired the
ground water supplies. The great majority of the Corbello award was for this damage,
and the plaintiff could simply pocket the award and was not required to use the award to
correct the problem. Act 1166 requires that if damage is alleged to have occurred to a
water aquifer, the award must be used to correct the problem. That eliminated a lot of the
incentive for suing extraction companies.

____________________________________________________ __________________________________
                                Economic Outlook Page 61
         Secondly, in the Terre bonne Parish School Board v Castex case the School
Board was suing to require the oil company to backfill canals that were dredged years
ago. This was especially troubling to the extraction companies because there are
thousands of miles of these canals across the southern part of the state and the co st of
filling them would be astronomical. The Louisiana Supreme Court over-ruled this
judgment and said firms cannot be required to backfill a canal unless it was specified in
the initial contract to drill. It was also determined that when permission is given to drill,
there will always be a ―footprint‖ that will be left that is reasonable to that activity. If the
footprint is excessive and not reasonable to that activity, the landowner has a right to sue.

       Despite the reforms and legislation passed in the regular session of the State
Legislature during 2006, several legacy lawsuits are still active in the state.

The Katrina & Rita Effects

       Like Lafayette, Houma received a nice injection of activity as a result of the two
hurricanes. Over the three years of 2005-07, Houma gained a whopping 12,400 jobs,
a remarkable increase of 14.9 percent or 5 percent per year. It was the fastest
growing area of the state. In fact, growth in Houma was so strong that in 2007, Houma
moved past Lake Charles to the fifth largest MSA in the state.

        The source of this employment reversal is much the same as occurred in
Lafayette. First, there was finally a response in the oil patch to higher oil and natural
gas prices. As an MSA heavily laden with exploration companies, oil service firms, and
shipbuilders for the offshore sector, Houma benefited from this resurgence. Too, this
MSA is home to many fabricating and repair/maintenance that benefited from the re build
effort of offshore energy infrastructure that was damaged by Katrina and Rita.

       Finally, Houma also benefited somewhat from an influx of evacuees. Houma, at
58 miles, is the closest MSA to New Orleans (Baton Rouge is 79 miles from New
Orleans). Based on FEMA assistance applications, we estimated that this MSA’s
population ballooned upward by 62,810 people in the first two weeks after Katrina---
second only to Baton Rouge in attracting evacuees.

        However, like Baton Rouge, Houma has experienced the same population
adjustment as did Baton Rouge and Lafayette. Census Bureau data show that between
July 2005 and July 2008, the Houma MSA population increased by 3,449 people or
about 1.7 percent. This is slightly more than the MSA tends to grow anyway. Thus,
there has been an exodus of evacuees from the MSA, but a number have remained there
as new residents, giving a bit of extra boost to the retailers, real estate firms, and service
providers in the area.

2008: Explosive Growth Ends

         The explosive growth of 2005-07 was obviously not sustainable and 2008 proved
that to be true. Based on data for the first 6 months of the year, the region is on a track to

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                                Economic Outlook Page 62
expand by about 900 jobs or about one percent. Partly this is due to a slowdown in
spending on damage repairs in the Gulf from the storms. However, we suspect that a
non-trivial part has to do with an under-count of employme nt by the Department of
Labor. We are expecting some significant revisions upward when revised data come out
after the first of the year.

Forecast for 2009-10

        Figure 26 contains both a historical track of Houma’s non-farm employment and
our forecast for 2009-10. We are estimating that the Houma MSA employment will
pick up speed over the next two years, expanding by 2,000 jobs in 2009 (+2.1
percent) and 2,200 jobs in 2010 (+2.2 percent). These projected growth rates would
earn Houma the title of the fastest growing MSA in the state.

                       Fig. 26: Houma MSA Non-Farm Employment
                                     Forecast: 2009-10
                                                 2009: 2,000 jobs (+2.1%)
                                                 2010: 2,200 jobs (+2.2%)


               80               1997: New Record
                                   (10 Years)    X

                1980     1985     1990      1995        2000       2005        2010

        What will generate this high-performance growth rate? It will come from four
primary sectors: (1) oil and gas extraction, (2) shipbuilding, (3) fabrication, and (4)
construction. This message is little changed from last year as these three sectors remain
the stalwarts in job creation for the region.

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                                Economic Outlook Page 63
Oil & Gas Extraction: High ene rgy Prices and the Lowe r Tertiary

        Because of its geographical location near the energy-rich South Louisiana and the
Gulf of Mexico, Houma’s economy reacts strongly to the unusually high energy-price
environment we are in now, as we have shown in Figures 25 and 26. Two factors in
particular are generating a great environment for the regions extraction and extraction
service firms. One is just the unusually high prices for oil and natural gas that we
documented back in Figures 8 and 10. At this writing (August 2008), oil prices are in
the $115 range and natural gas prices exceed $8 mmbtu. Both are in the extremely
profitable range for these companies.

         A second factor, which we mentioned in our write up of the Lafayette region, has
been the discovery of the lower tertiary trend in the deep waters of the Gulf of Mexico.
This new find is thought to hold 9-15 billion barrels of recoverable oil, making it
approximately the size of the huge Prudhoe Bay discovery on the north slope of Alaska.
This find could increase U.S. oil reserves by a full 50 percent. Servicing and exploring
this trend will create a lot of business for Houma area firms for years to come.

Shipbuilding: Booming Chouest/Potential Boom for Bollinger

        Economists often point out that when a specific industry in an area expands, it has
spillover or ―multiplier‖ effects on other industries in the area. Like a rock being dropped
into an economic pond, ripples are sent out to the edges of the pond.

         One of the sectors where Houma’s booming extraction sector has and will create
spillover effects is in shipbuilding. One of the largest sources of job growth in this MSA
will come from Edison Chouest, a company that manufacturers and operates ships that
service the offshore oil and gas extraction industry. EC is hiring new workers at several
of its locations. First, the firm is opening a new shipyard---LaShip---in Houma. The firm
will start hiring with a vengeance in 2009 and wants 1,000 new employees. At its North
American Shipyard the firm would like to hire another 150 people, and at North
American Fabricators, another 150 workers. It is building a new dry dock at Port
Fourchon that will require 200 more employees. The firm is currently producing a new
vessel about every 6 weeks. Each of those new vessels requires a crew of 20-22, another
source of new high-wage ($150-$700 a day) jobs for the MSA.

        A second major shipbuilder in the area is Bollinger Shipyards. Currently
Bollinger employs about 3,000 workers. The firm has been working for about 7 years on
three major government contracts on which award announcements will be made over our
forecast period. If the firm luckily hits on all three, it will need to double its workforce to
6,000. Bollinger is also constructing 5 new dry docks that range in price from $5 - $20
million a piece.

        Not surprisingly, labor is a major issue for these shipyards. The problem is not
only finding labor but also finding a place to house them. Bollinger has constructed
housing for about 1,000 INS workers.

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                                Economic Outlook Page 64
The Fabricators: Gulf Island Growing/McDermott Stable

        The two largest fabrication firms in the area are also enjoying a banner year.
Employment at Gulf Island Fabricators is up to 1,200 plus 200 contract workers, and
the firm would like to hire 200 more. GI has seven major projects, enough work to keep
the plant busy for 3-4 years. Not only is there plenty of work building topsides for
offshore production platforms, but the firm has also developed a new niche market---
fabricating modules for chemical plants. Building items onsite at chemical plants often
involves stringent homeland security issues and sometimes the wearing of fire suits.
Chemical firms have discovered that money can be saved by fabricating these items
offsite at GI and bolting them in place once delivered to the chemical plant. GI is also
building 9 brown water vessels

        While not technically located in the Houma MSA, J. Ray McDermott‟s
fabrication facility is right on the border of the MSA. After seeing its employment
decline from 2,500 to only 75, McDermott’s workforce has now risen back up to 1,000
plus 200 subcontractors. McDermott is also branching into the chemical plant module
business like Gulf Island and is fabricating flues and duct work and barges. The firm
expects its employment level to be stable over the next two years.

Construction: Roads and Coastal Restoration

        Construction will play a larger role in this economy’s future over the next two
years than normal. There will be three areas of concentration. The first is LA1. About
1,000 vehicles a day make the trip to Port Fourchon on what is essentially a two- lane,
third world roadway. That will be changing as work has begun on LA1 highway
improvements. Phase I of this $1.3 billion project has started with a $202 million
contract to build a 4.4 mile overpass spanning Bayou LaFourche to replace the Leesville
Bridge. This is part of a $1.3 billion project to build an elevated highway from Golden
Meadow to Port Fourchon. This work will provide a shot in the arm to construction firms
in the area.

        In addition to LA1, This MSA will enjoy $63.6 million in state highway projects
over 2008-11. Chief among these projects will be the Prospect Street Bridge, an $18
million project.

       Thirdly, this area will see an unusual amount of money spent on coastal
restoration. A total of $55 million has been set aside for this purpose, including $40
million for the Morganza to Gulf levee system and another $15 million for the LaRose to
Golden Meadow levee system.

      Lake Charles: Big Boosts from Leucadia, Sugarcane Bayou, & Sonoma

      Located in the far southwestern corner of Louisiana (see Map 1), the Lake Charles
MSA is composed of two parishes---Calcasieu and Cameron. This MSA is dominated by

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                                Economic Outlook Page 65
three industries. One is what is broadly referred to as the petroche mical industry. This
phrase handily combines two closely related industries---chemicals and refining. The
Lake Area Industrial Alliance reports that Calcasieu Parish was the home to 19 different
chemical plants and two refineries in 2006. Adding in the Entergy Nelson Station and
the Trunkline LNG plant would bring total employment in these 23 facilities to 6,158
with combined payrolls and benefits of $713 million. Like the Baton Rouge area, this
huge capital- intensive petrochemical complex supports a very large industrial
construction industry.

       A second major industry in Lake Charles is gambling. Pre-Rita, Lake Charles
was home to five riverboat casinos. One---L‟Aube rge du Lac---is the largest and just
opened in the summer of 2005. Prior to this opening, the other four casinos employed
2,695 workers. L’Auberge du Lac added about 1,500-1,800 employees to that mix. Rita
badly damaged both of the casinos owned by Harrahs. Harrahs sold its two licenses to
Pinnacle Entertainment, owner of L’Auberge du Lac. Pinnacle is using one license to
construct a new casino resort---Sugarcane Bay Casino. The other license has been
moved to Baton Rouge.

        We have estimated that before the fifth casino was opened, the other four had
supported 6,464 jobs in the MSA either directly or via the multiplier effect. With the
closest gambling establishments to the Houston metroplex, Lake Charles’ riverboat
casinos were an instant success when they opened in the mid-1990s. When Delta Downs
added slot machines and became a ―racino‖, it added another 1,057 workers to the a rea’s
gambling industry.

       A third key sector is aircraft repair. There are now two significant employers
located at Chennault Industrial Airpark---Northrop Grumman and Aeroframe
Services. Changes in tenants at Chennault have had a major impact on the MS A’s
employment pattern over time. Closely allied with the aircraft industry, two significant
employers at Lake Charles Regional Airport are Era Helicopte rs with 750 employees
and PHI---another helicopter service firm.

A History of Ups and Downs

        A history of the Lake Charles economy is depicted in Figure 27. This MSA
suffered mightily between 1981 and 1986 as the chemical industry reeled from a huge
loss of sales in its foreign markets. The region lost a whopping 17.9% of its non-farm
jobs. This loss was caused by a large run up in the exchange value of the dollar (see
Figure 7). Not only did the industry itself reduce employment by one-third, but capital
expansion plans were also halted, hammering the industrial construction sector at the
same time.

         Coincidentally, the Reagan Administration fully de regulated the price of crude
oil in the early 1980s. One side effect of this action was that several marginal refineries
found it increasingly difficult to remain competitive and shut down. The loss of jobs in
the two highest-wage industries in Louisiana’s manufacturing sector, combined with a

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                                Economic Outlook Page 66
shuddering halt to industrial construction and other negative multiplier effects, sent the
Lake Charles economy into a serious, 5-year dive.

        Lake Charles was actually the first MSA in Louisiana to begin recovering from
the terrible statewide recession of 1982-87. The key was the attraction of Boeing
Aircraft to Chennault Field. Boeing created over 2,000 jobs to refurbish K-135 transport
airplanes for the Air Force. That helped set Lake Charles off on a recovery mode. The
recovery was further aided by a sudden drop in the exchange value of the dollar, which
rejuvenated foreign markets for the chemical firms and set them off on a new round of
hiring and capital expansions. (Note the magnitude of this recovery is distorted in Figure
27 by the addition of Cameron Parish employment data to this MSA’s job statistics.)

                    Fig. 27: Lake Charles MSA Non-Farm Employment:


               90                           Casino
               80                                                     2005-06:

                                                                      + 2,700 jobs
                    1990: Cameron Added     1992
               70                           Boeing

                1980       1985      1990       1995         2000         2005
        In 1992, Boeing announced the closure of its facility, and the job loss there caused
Lake Charles’ employment to slide sideways for two years. The next three years were
excellent growth years for Lake Charles. Three factors powered this expansion. First,
there were some unusually large capital projects under construction in the petrochemical
sector. Citgo and Conoco/Pennzoil combined for $1.6 billion in expansions during this

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                                Economic Outlook Page 67
        Secondly, it was during this period that the riverboat casinos came to Lake
Charles. Thirdly, Boeing was replaced at Chennault Airpark by Northrop Grumman---
a facility that took 707s, stripped them down, and installed the Joint System Target
Attack Radar System (JSTARS) in them. This was an addition of 1,900 good-paying
jobs for the Lake Charles economy.

         It is obvious from Figure 27 that the good times ended for Lake Charles in 1999.
The MSA lost 2,800 jobs in that year, and was essentially flat for the next six years.
There were several contributors to this poor performance. The first involved hits at the
aircraft repair facilities at Chennault Airpark. As Northrop Grumman came near the end
of its JSTARS contract, the firm began handling fewer aircraft and consequently began
terminating workers. NG is now doing maintenance and repair work on the JSTARS
aircraft, and its workforce has dropped all the way down to 302. The attraction of EADS
to Chennault helped offset NG layoffs somewhat, but even that firm reduced its
workforce from about 350 down to 160 before selling to Aeroframe Services.

       Secondly, a combination of 9/11 and the national recession reduced trips to the
area gambling establishments, prompting layoffs there. Thirdly, Xspedius moved its
headquarters office in Lake Charles to St. Louis.

        But by far the most important contributor to the downturn was the funk in the
chemical industry. High natural gas prices forced this vitally important industry in Lake
Charles to hunker down and look for ways to reduce costs. One way was to reduce the
number of employees. Too, the industry placed capital expansion projects on hold and
delayed maintenance/repair work as much as was safely feasible. The result was a
significant reduction in industrial construction employment.

The Surprising “Rita Effect”

       What may surprise readers the most about the data in Figure 27 is the growth in
2005 and 2006. Despite being hit by a vicious storm this MSA’s employment actually
grew---adding 2,700 jobs over those two years. The larger portion of that growth
occurred in 2005, the year of the hurricane.

        Note the “V”. Figure 28 tracks monthly employment in the Lake Charles MSA
from January 2005 to July 2008. On a monthly basis Rita took away 1,700 jobs from the
area---a 1.9 percent reduction. While a tough hit in a one- month time frame, this drop
was far less than the nearly 29.5 percent decrease experienced in New Orleans.

        However, the most striking thing about this picture is the ―V‖ in employment in
the neighborhood of the storm. Remarkably, by November 2005 employment was back
to where it was the previous November.

      This is what one might normally expect when a disaster like this occurs.
Employment initially falls, then all the private insurance and federal rebuild money is
pumped into the economy, and the construction sector leads the economy out of the

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                                Economic Outlook Page 68
slump. Indeed, all evidence points to that phenomenon in Lake Charles. In the first year
after Rita, construction employment jumped 23.5 percent in the MSA.

              Fig. 28: Lake Charles MSA Monthly Non-Farm Employment
                   Nov. '05 (X): New Record
              93   (seasonally adjusted)


              87                  -4,500 jobs (-4.9%)
                               (v. NO -177,900 (-29.5%))
               2005           2006                 2007                2008

        Why the “V”? There were 47,384 homes damaged by Rita in this MSA---but
only 2,284 incurred severe damage and 6,673 major damage. Residents could and d id
return to the Lake Charles area fairly quickly. Normally one would be aghast at these
figures, but against the backdrop of the housing destruction in New Orleans, they pale. It
is very important to note that with the exception of lower Cameron Parish (the most
sparsely populated parish in the state) there was virtually no flood water damage in
Lake Charles. That means regular homeowner’s insurance was applicable to the damage.
As a result, all the brakes on rebuilding that existed in New Orleans due to standing flood
waters did not exist in Lake Charles.

        Rita‟s impact on Lake Charles manufacturing. It is the nature of the
manufacturing industries in Lake Charles that they would seemingly be very vulnerable
to a powerful storm like Rita. Chemical plants and refineries are very capital- intensive,
and all their capital is outside and exposed to the elements. In fact, three large refineries
in the area were damaged and shut down: (1) Citgo (324,000 bd); ConocoPhillips
(239,400 bd), and (3) Calcasieu (30,000 bd). All three were back up by December 2005.

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                                Economic Outlook Page 69
       The aircraft industry, which operates in large hangers, seemed likely victims of
high winds. Despite these vulnerabilities, these industries made it through the storm
without losing much downtime. There was $40 million in damage to hangers at
Chennault, but the two firms operating there continued to do so despite the

       Importantly, staffing was not as difficult a problem as in New Orleans because
most housing remained intact in Lake C harles.

         Rita‟s impact on the Lake Charles gaming sector. As a result of Rita the two
Isle of Capri-owned casinos and the L’Auberge du Lac encountered minor damage and
were reopened by November. However, the two Harrah’s riverboats were badly damaged
by the hurricane. Again, Pinnacle Entertainment, which owns L’Auberge du Lac,
purchased both of Harrah’s licenses in Lake Charles. Pinnacle is using one of the
licenses to start construction this year on a $350 million facility called Sugarcane Bay
Casino Resort that will employ 1,500-1,600 workers. Pinnacle is moving the other
license to Baton Rouge.

        Rita‟s impact on othe r sectors. A look at other sectors in Lake Charles indicates
a solid recovery in the aftermath of the storm. By January 2005, all hospitals in the MSA
except one in Cameron Parish were fully operational. The Lake Charles Regional
Airport is now operating at an even higher level than pre-Rita. By contrast, the New
Orleans airport is still operating well below pre-Katrina levels. Due to severe damage
caused by Rita to the main passenger terminal, all commercial flights are still arriving
and departing from a temporary passenger terminal located near the original terminal.
Work is underway on a new terminal building which will open mid-2009.

        Within a month of Rita’s landfall, all of the public schools in the MSA had
reopened and virtually all hotel room space is now back to normal. The Port of Lake
Charles escaped any flooding by Rita. However, it did experience about $40 million in
wind damage and initially had no power. Within a few days power was restored and the
port was open to receive shallow water vessels. All repairs are now complete and the
port is expecting to spend over $100 million on capital improvement projects over the
next five years.

Construction Still Strong: 2008 – a Lull

       Careful reviewers may have noticed another important fact back in Figure 27. In
2007 Lake Charles MSA set a ne w record in employment this year---exceeding the
previous peak by 1,700 jobs. Construction associated with the storm recovery was still
robust in 2007, about 2,200 jobs higher than just after Rita. However, construction’s
growth peaked in 2007 and is slightly lower this year, constituting something of a
temporary drag on the area economy. In addition, Citgo announced it was closing its
192-peron lube plant in 2008 which added to the drag.

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                                Economic Outlook Page 70
Forecast for 2009-10

        Figure 29 shows our forecasts for the Lake Charles MSA over the next two years.
We are expecting the next two years to be particularly good for Lake Charles with 2,000
ne w jobs in 2009 (+2.2 percent) and another 1,800 jobs in 2010 (+1.9 percent). This
will put the MSA in a dead heat with the Houma and Lafayette MSAs as the fastest
growing in the state. It everything falls in place just right, Lake Charles’ outlook could
easily turn out even brighter than we have forecasted.

                    Fig. 29: Lake Charles MSA Non-Farm Employment
                                Forecast: 2009-10


               90                       Casino


               1990: Cameron Added X   1992
               70                      Boeing
                                       Closure              2009: +2,000 (2.2%)
                                                            2010: +1,800 (1.9%)
                1980     1985    1990        1995       2000        2005       2010

       What is behind this very optimistic outlook? Pinnacle Entertainment will play a
key role. First the firm will spend $350 million---mostly in 2009---to construct the
Sugarcane Bayou casino resort. Once constructed, this huge facility will employ 1,600-
1,800 people---a hefty job-shot to the area economy.

       Secondly, the largest single construction job ever announced in the southwest
Louisiana economy’s history occurred earlier this year when Leucadia sold $1.6 billion

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                                Economic Outlook Page 71
in Go Zone bonds to construct a synthetic natural gas plant. Leucadia will use petroleum
coke from local refineries to make the gas. Construction is to start in early 2009 and will
be completed in about 2011. Once completed, the firm will employ about 150 people at
an average wage of $65,000-$75,000 annually.

        Another major project for the region is the new Shaw Project. Shaw will build a
new manufacturing $100 million plant at the Port of Lake Charles to manufacture parts
for nuclear power plants. The new facility would end up with a workforce of 1,400 very
well-paid employees and should open in late summer 2009.

       In addition to these three mega-projects, there is a significant amount of other
construction activities on Lake Charles’ immediate horizon. They include the following:

      Area chemical firms will spend an average of $350-$360 million in capital
       expenditures on environmental upgrades over the next 5 years. These proje cts
       will basically create no new permanent jobs, but many temporary construction

      The state plans to spend $98.2 million on road projects in the area over 2008-11,
       including $26.5 million on the I210 Prien Lake Pier.

      $20.5 million will be spent by the state on coastal restoration projects, including
       $15 million for the Cameron Gulf shoreline.

      Trunkline LNG is spending $148 million on a project to double its capacity and
       Cameron LNG is spending $50 million on a second phase of their facility.

      PL Propylene has announced a $400 million project, Basell USA has announced
       a $41 million cogeneration facility, and W.R. Grace has announced a $21 million

      Construction on the $28 million airport terminal will continue through mid-

Aeroframe & Northrup Grumman: Mixed News

       We mentioned in last year’s LEO that the news from Lake Charles’ aircraft repair
sector was mixed. That has not changed for the immediate future. Aeroframe‟s
employment is at 450 and should be at 500 by the end of 2008. The goal is to have 1,550
by 2012. Fedex is Aeroframe’s largest customer. The problem for this firm is finding
enough labor to meet the customer’s needs. In August 2008, Aeroframe was awarded a
$50 million LDED grant to construct a new tail dock. This should enable the firm to hire
50 more employees.

        Across the fence at Chennault Airpark is the Northrup Grumman operation. NG
is largely engaged in maintenance work on the JSTARS aircraft. The firm also builds the

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                                Economic Outlook Page 72
antenna for the MESA radar and works on spare parts for the Navy’s Hawkeye aircraft.
NG’s employment is scheduled to fall from 302 this year to 277 in 2009. In August
2008, NG also received an LDED grant for a new assembly building. NG is awaiting
word on a maintenance contract on the Air Force’s KC10 aircraft. If it hits on that one,
NG’s workforce will increase by 350.

                             Monroe: Whe re‟s the Meat?

        Located in the northeast corner of the state (see Map 1), the Monroe MSA is now
comprised of two parishes---Ouachita and Union. Monroe is the second smallest MSA in
the state (above Alexandria), with an estimated 78,700 non- farm jobs in 2008.

        Until recently, this MSA had the highest concentration of employment in the
broad category called ―finance/insurance/real estate‖ (FIRE) of any MSA in the state.
Partly that was because of the 1,800-person Chase Mortgage facility. Another big
contributor to this ranking was the 1,200-person State Farm claims center. The latter
closed its doors in 2005, and Chase absorbed the Bank One documents depository, so
FIRE’s influence in this MSA’s economy has been reduced somewhat.

        Other large employers in the region include Graphics Packaging, a paper/carton
plant that employs about 750 people, and CenturyTel also plays a key role in this MSA’s
economy with its 1,450-person workforce. Delphi Lighting was a major player until it
closed its 800-person headlight manufacturing facility in June 2007.

Monroe Employment History

        Figure 30 traces Monroe’s employment history from 1980 to 2008. Like Baton
Rouge this MSA was only lightly tapped by the deep recession of 1982-87. Monroe only
lost jobs for two years---1986 and 1987---and even then the decline was only 2 percent as
compared to the 9 percent statewide job loss. The reason for the light hit is that Monroe
has almost no jobs in extraction or chemicals, which were the two industries that suffered
the most during that recession.

        By 1989, Monroe had retrieved all those lost jobs and was setting new
employment records. Between 1987 and 2002, this region enjoyed a 14- year stretch of
growth, with five of those years registering 2.5 percent plus annual growth rates. (The
increase in 1990 is distorted by the addition of Union Parish to the MSA’s numbers.)

        The next three years were not good ones for the Monroe MSA. After going flat in
2002, the MSA lost 1,300 jobs over 2004-05, a 1.6 percent decline. The biggest hits
came with the initial layoffs, and then total closure of, the State Farm Ins urance claim
office, costing the area 1,100+ jobs. Guide Corporation reduced the workforce at its
headlight plant, and Graphics Packaging also engaged in workforce reductions.
Holsum Bakery closed its facility in Monroe, terminating 50 employees in the process.

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                                Economic Outlook Page 73
                   Fig. 30: Monroe MSA Wage & Salary Employment
                                14 Straight Years of Record Growth
              80                       (19,400 New Jobs - +35%)




              60   1990: Union Added X

                                     X 1989: New Record
               1980      1985        1990     1995        2000        2005

       Monroe took another hit in 2007 when Guide Corporation shuttered its facility,
costing the area 650 jobs with an annual payroll of $53 million. Monroe did attract
Accent Marketing, a call center for the old State Farm building but this has obviously not
been enough to offset these other major losses. As seen in figure 30, Monroe has been in
a slow slide since 2003, losing a total on 1,500 or 1.9 percent of its workforce.

Forecast for 2009-10

        Figure 31 shows our projections for the Monroe MSA over the next two years.
We forecast that employme nt in the Monroe MSA will be ane mic, rising only 400
jobs annually over 2009-10. This would give Monroe the dubious distinction of being
the slowest growing MSA in the state.

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                                Economic Outlook Page 74
                    Fig. 31: Monroe MSA Wage & Salary Employment
                                    Forecast: 2009-10
                                                            2009: +400 jobs (+0.5%)
                                                            2010: +400 jobs (+0.5%)




              60 1990: Union Added X
                                        X 1989: New Record

               1980        1985        1990        1995        2000        2005        2010

        Construction will play the biggest role in pushing the Monroe economy along
over the next two years. Among the key projects are the following:

             $30 million will be spent building two new schools and adding to another.

             The state will spend $51.9 million on roads projects in this MSA over 2008-11.

             A new $35 million terminal is being constructed at the airport.

             $45 million will be spent to construct a new community college campus.

        While these new construction projects involve important infrastructure work, the
reader will notice there are no industrial or commercial expansions of any consequence
on this list. Unfortunately, CenturyTel has announced the elimination of 200 positions.

        The Monroe region is not without any good and hopeful news. Most importantly
there is the large mega-site that LDED has purchased nearby that would be ideal for a n
automobile manufacturing plant. We understand Governor Jindal is planning a trip to
Asia to promote the site. Too, the region received good news this year when the decision

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                                Economic Outlook Page 75
was made to convert the International Paper plant in Bastrop to manufacturing fluff
paper products---saving 525 out of the 600 jobs threatened at the plant. Accent
Marketing is also bidding on an important contract that could enable the firm to double
its 500-person workforce.

                              Alexandria: Entering a Lull?

        Alexandria is the smallest of Louisiana’s eight MSAs with about 65,500 non-farm
employees in 2008. Historically, the Alexandria MSA was comprised of only one parish-
--Rapides. However, in 1990 Grant Parish was added to this MSA. Alexandria derives
the lowest percentage of its employment from the ―basic‖ sectors---mining and
manufacturing---of all the MSAs in the state. Located in the central part of Louisiana
(see Map 1), it has typically served as the retail/services center for the north/central part
of the state.

        Alexandria also has the highest percentage of employment in the government
sector of the MSAs as well---even larger than Baton Rouge, which is the state capital and
home to two large state universities. Nearby Fort Polk is the largest military installation
in the state. While not actually located in the Alexandria MSA, this huge base has a
noticeable impact on this MSA’s economy. Proctor & Gamble has a significant
operation in this MSA, as does International Paper and now a new firm---Union Tank

Alexandria‟s Recent Employment History

         Alexandria’s employment history is illustrated in Figure 32. Four key points will
be noticed by the careful reader when viewing this figure. First, note that there was a
slight bump upwards in 1990. The Department of Labor has revised the employment
statistics only back to that year to take into account the addition of Grant Parish to this

      Secondly, note that this MSA enjoyed an almost recession-free history until
2001. Except for a mild decline in 1982, its employment track had basically been a line
moving constantly upward for the last two decades of the 20 th century.

        Even the post-911 national recession in 2001 only mildly impacted the Alexandria
MSA, causing a meager loss of only 200 jobs. This means the Alexand ria MSA was the
least impacted of all the state’s eight MSA---not a surprising finding given the low
manufacturing base and the government-orientation of the region.

        Note thirdly that there is a distinct kink in the graph starting in 1992. Two
factors contributed to this nice boost in Alexandria’s growth rate. The first was a
seemingly negative event---the closure of England Air Force Base. Civic and
governmental leaders turned this economic lemon into lemonade by gaining control of
the Base assets and turning it into an industrial park/retirement village. England

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                                Economic Outlook Page 76
Industrial Park is now almost totally reoccupied. Several businesses have moved to the
site, and the regional airport has been relocated there. Too, during this period I-49 was
being constructed through the heart of the city, adding an unusual injection of
construction jobs to the economy. There was a slight slowdown in 1996-97 when one of
England’s newest and largest tenants---J.B. Hunt Trucking---shut down their operation

                   Fig. 32: Alexandria MSA Non-Farm Employment



              55               Closure of
                              England AFB
              50                                             -200 jobs

              45                  X Grant Parish added

               1980    1985       1990         1995         2000         2005

        The recovery from the 2001 recession was initially lackluster at best.
Employment was basically flat from 2002 through 2004. However, as seen in Figure 32
the next three years were very good ones for this MSA. Employment jumped by 4,200 or
a strong 2.3 percent annually.

        During this rapid expansion phase there was (1) a doubling of the size of the
federal prison at Pollock, (2) significant capital expenditures at England Airpark, (3)
$132 million on the construction phase of Union Tank Car (UTC), and (4) UTC began a
hiring process that has resulted in 600 workers at its new plant. On the outer edges of the

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                                Economic Outlook Page 77
MSA a new $60 million MARTCO plant was constructed, there was a $100 million
addition to the Paragon Casino in Avoyelles Parish, and a large amount of construction
spending took place at Fort Polk. While these three projects are outside of the MSA’s
borders, they created extra earnings which were often spent in Alexandria’s retail and
service establishments. Offsetting all this good news was the closure of Parta Systems,
a 110-person pharmaceutical parts manufacturing plant.

Forecast for 2009-10

       Figure 33 contains our forecasts for the Alexandria MSA for the next two years.
We are projecting that this MSA‟s growth rate will enter a lull of sorts adding will
800 ne w jobs in 2009 (+1.2 percent) and only 500 in 2010 (+0.8%).

                   Fig. 33: Alexandria MSA Non-Farm Employment
                                   Forecast: 2009-10
                                                   2009: 800 jobs (+1.2%)
                                                   2009: 500 jobs (+0.8%)




              45                X Grant Parish added

               1980    1985     1990       1995        2000        2005       2010

       Why the lull? Largely this is due to the completion of some large scale
construction projects at England Airpark, the completion of the huge Cleco
Rodemacher plant in 2009, and the fact that Union Tank Car is at the end of its hiring

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                                Economic Outlook Page 78
       UTC is presently at a workforce of 600 and will peak at 640. At first the firm was
heavily into the construction of cars to transport ethanol. However, the ethanol market
appears to be in trouble, so more emphasis will be placed in the future on manufacturing
pressure cars. This will mean producing fewer cars per year---16,000 versus 18,000---but
pressure cars require more man hours to build, so fewer cars des not mean a reduced

        Cleco’s $14 billion retrofit of the Rodemacher power plant is presently employing
about 1,700 construction workers. That work will end in 2009, causing those 1,700 jobs
to vanish---one factor behind our slower growth projection for 2010 for the re gion.

       On a more positive note, the Alexandria MSA will get a nice jolt to its
employment as hiring begins to staff the third phase of the federal prison at Pollock.
The prison will add 350 employees in this phase.

        An additional boost will come to the area in the form of sizeable construction
projects. For example, the state will spend $208.4 million on road projects in the two-
parish MSA over 2008-11. Among the larger of these projects will be $119 million on
US71/US165 and $25 million on the Vernon line to LA121 segment. The City of
Alexandria has announced a new infrastructure program called SPARC that will involve
spending $96 million over the next 5 years.

         There are several projects of considerable size going on just outside the perimeter
of this MSA’s boundaries. We will describe these in the ―rural‖ section below. Because
of their nearness to Alexandria, the retail and service firms in this MSA should stand to

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                                Economic Outlook Page 79
                     THE OUTLOOK FOR THE RURAL PARISHES: 2009-10

       Back in Map 1 we illustrated where the eight MSAs are located in Louisiana.
Twenty nine of the state’s 64 parishes are located in these eight MSAs. The remaining
35 parishes are designated as ―rural‖. With few exceptions, most of these rural parishes
have a distinctly agricultural economic base. Among the exceptions are Tangipahoa,
Lincoln, and Natchitoches Parishes---which are homes to relatively large universities---
the coastal parishes of St. Mary, Iberia, and Vermillion---which have a significant
attachment to the oil and gas extraction industry---and Vernon Parish on the central
Texas border which is the home parish for Fort Polk, a very large military base.

        About one- fifth of the state’s employment exists in these 35 parishes. Figure 34
tracks employment trends since 1990 in these 35 parishes and provides forecasts for
2008-09. As was the case when we described the New Orleans MSA, the Department of
Labor rather radically revised the employment numbers in the rural parishes for 2005 and
2006. Initial numbers suggested a substantial decline in rural employment in those years.
Revised numbers showed precisely the opposite. As seen in Figure 34, rural non-farm
employment has leapt by 8.1 percent or 37,800 jobs in the four year since 2004---an
impressive average annual growth rate of about 2 percent. This growth occurred
despite the fact that at least two rural parishes where heavily damaged by the hurricanes--
-Washington Parish by Katrina and Vermillion Parish by Rita.

                         Fig. 34: Non-Farm Employment - Rural Parishes
                                                    2009: 3,800 Jobs (1.0%)
              380                                   2010: 4,100 Jobs (1.1%)







                    90     92   94   96   98   00    02     04    06     08     10

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                                Economic Outlook Page 80
        The other conclusion evident from reviewing Figure 34 is how sensitive
employment in this rural area is to national recessions. Note that in the early 1990s
recession rural employment fell for three straight years. Rural parishes lost 10,600 jobs,
a drop of 3.3 percent. Then in the post-911 recession, rural region employment fell hard
for two years---a loss of 15,300 jobs or 4.3 percent. A primary reason for this sensitivity
is that many large wood products firms are located in Louisiana’s rural parishes. When
there is a national downturn, the housing sector gets hammered, and that means that
lumber firms get hammered as well.

       Note in Figure 34 that we are projecting employment in rural Louisiana will
continue to rise over the next two years but at a much more sustainable pace. We are
forecasting 3,800 ne w jobs in 2009 (+1.0 perce nt) and 4,100 jobs in 2010 (+1.1
percent). There are certain rural parishes where there are clear signals of employment
growth, such as:

      In Tangipahoa Parish, North Oaks Hospital is planning a $250 million expansion
       and the area recently attracted Gray & Company, a 200-person oil and natural
       gas insurer that may build a $12-$15 million office/hanger complex at the
       Hammond Airport. The state has almost $16 million in road projects planned for
       this parish as well.

      Parishes along the southern coastal area of the state---especially St. Mary and
       Vermillion Parishes---have always thrived when oil and natural gas prices have
       swung as high as they have recently. We expect oil and gas service firms,
       extraction companies, and fabricators in these parishes to do very well over 2009-

      In St. James Parish, Petroplex will be constructing a $300 million oil storage
       facility. This parish stands to make huge gains if the Nucor iron mill decides to
       locate in the parish rather than Brazil.

      Grupo Zaga is building a $75 million textile mill in Lacassine near Lake Charles.
       The plant will employ 160 people.

      Northrop Grumman plans to add 50 workers to its facility in Tallulah.

      Webster Parish will experience a nice shot in the arm due to expanded activities at
       Camp Minden. A $90 million investment is underway there to create a Regional
       Training Institute to train thousands of active and reserve military personnel. This
       is training for personnel who have completed basic training. If Barksdale AFB is
       fortunate enough to land the CBAT program, Camp Minden will likely be the site
       of even more training.

      A $45 million expansion and renovation of an abandoned juvenile facility in
       LaSalle Parish by the GEO Group will house 254 private and 150 government
       jobs to handle illegal aliens.

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                                Economic Outlook Page 81
      The Jeld-Win Corporation that manufactures windows and doors is opening a
       new 75-100 person plant in Winn Parish.

      LA Elastomers is opening a new facility in Concordia Parish this year that will
       add 75 jobs over the next two years.

      Our readers should be paying close attention to events at Fort Polk in Vernon
       Parish over the next few years. The base will be spending $166 million to
       upgrade barracks and will be adding a 900-person anti-terrorist group. In January
       2011 a new battlefield Surveillance Brigade will come to the Fort, bringing with it
       1,800 military and 1,800 civilian contractors, a huge new injection of economic
       activity into this region.

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                                Economic Outlook Page 82
                        THE OUTLOOK FOR THE STATE: 2009-10

        In the pages above we have reviewed the prospects for Louisiana’s eight MSAs
and its rural parishes for 2009-10. For the state as a whole, it just becomes a matter of
summing up the MSA and rural outlooks. This is handily done for the reader in Figure

                        Fig. 35: Louisiana Non-Farm Employment
                                                         2007: New Record



                                                    2009: +27,000 Jobs (1.4%)
                                                    2010: +26,800 Jobs (1.4%)

                 1980    1985      1990       1995        2000        2005       2010
       The most important message from Figure 35 is the healthy projected growth for
the Louisiana Economy. We are projecting 27,000 ne w jobs in 2009 (+1.4 pe rcent)
and 26,800 jobs in 2010 (+1.4 percent). Louisiana began setting record levels of
employment in 2007---getting all the losses from Katrina and Rita back over about 18
months---and will continue setting records through 2010. By 2010, we expect the state to
be only about 4,500 jobs away from being a 2,000,000-job economy.


        State revenues are mostly determined by the state’s tax structure, overall
economic conditions, and any specific characteristics of the state that provides a major
source of tax collections. For example, in Louisiana oil and gas revenues have been a
major source of revenues for a number of years, though, recently, it has been a smaller
part of the state’s revenues. In Figure X, we illustrate the percent of tax collections from
the seven major revenue sources in fiscal 1981 and fiscal 2007. In 1981 the state
collected 40 percent of its overall revenues from minerals, including severance, royalties,

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                                Economic Outlook Page 83
bonus, and rentals. It collected 25 percent of its total revenues from sales and use taxes
and 5 percent of its revenues from the personal income tax.

                  Figure X. State Revenue Sources
                     Fiscal 1981 and Fiscal 2007
                                                     1981   2007

                           Mineral   Sales     PIT      Corp    Gaming Fuels         Others

        By 2007 the state collected 29 percent of its revenues from the personal income
tax, 28 percent from the sales and use tax, and 13 percent from minerals. The state made
a major transformation of revenue sources over a 27 year period.               Oil and gas
production declined and prices also declined in certain periods of the 27 years, though
now prices have increased substantially. The personal income tax had been augmented
by constitutionally mandated increases, but the state’s income tax collections have also
been related to major changes at the federal level which automatically affect the state’s
personal income tax collections---and all of the federal changes have had a positive
influence on state personal income tax collections.         The sales tax base has been
diminished in the last five years though other factors may have fully offset this decline in
the sales tax base.

       However, starting in fiscal 2006 the state disco vered another factor that has a
major impact on state tax collections—namely, hurricanes and especially Hurricanes
Katrina and Rita.

Katrina and Rita

        Hurricanes Katrina and Rita left indelible marks on individuals, businesses, and
state and local governments. The State of Louisiana was in the first quarter of its 2005-
06 fiscal year when the hurricanes struck. 2 The state budget had been balanced and the

    The state fiscal year for 2005-06 is fro m July 1, 2005 through June 30, 2006.

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                                Economic Outlook Page 84
expectation for the economy for 2005-06 was moderate growth. 3 The hurricanes
suddenly changed the economic structure, altered potential revenue streams for both state
and local governments, and imposed new expenditures on state and local governments.

   On October 28, 2005, in a special meeting agreed to by all participants, the Louisiana
Revenue Estimating Conference met to reconsider the revenue estimates determined on
May 16, 2005 4 for the fiscal 2005-06 state budget and the estimates used to determine
appropriations for 2005-06.5

    There was no direct information on actual tax collections after Hurricanes Katrina and
Rita because of the timing of collections and then remittance to the state. The Louisiana
Department of Revenue had granted extensions to businesses in the areas affected by
Katrina when taxes had to be remitted. The information available was the knowledge
that a sizeable portion of the Louisiana economy had been badly damaged : over 200,000
homes were uninhabitable; 6 the New Orleans tourist industry had been temporarily
shutdown; major employers such as Shell Oil Company, private and public universities,
most hospitals and medical providers, and almost all law firms had seen their employees
evacuate the city; the Port of New Orleans, major shipyards, and Lockeed-Martin space
shuttle program had been closed; and, Louisiana citizens were scattered throughout all 50
states and two territories. 7

    In addition, the Louisiana Department of Labor reported a surge of new claims for
unemployment insurance benefits—over 300,000 as opposed to about 20,000 in a normal
year. These are the citizens that pay personal income taxes, general sales taxes, and
selective sales taxes to the state. It should be noted that the New Orleans Metropolitan
Area accounted for over 30 percent of the Louisiana economic base. This was the
potential magnitude of the disaster looking at it from the state’s perspective.

       In addition, major oil and gas properties within the taxing jurisdiction of
Louisiana were shutdown due to damage caused by Katrina or Rita. 8 However, due to
the hurricanes and international developments the global price of oil was reaching the
$60 per barrel level and the price of natural gas in the United States was reaching in
excess of $10 per thousand cubic feet. 9 Louisiana gets over 12 percent of its revenues
from oil and gas activities.

        Finally, the state gets about 8 percent of its revenues from gaming activities---a
land-based casino in New Orleans, fifteen riverboats scattered around the state but with
three located in New Orleans affected by Katrina and five located in Lake Charles

  Louisiana Economic Outlook, 2005-06. Loren C. Scott and James A. Richardson. (October 2004).
  The Louisiana Leg islature meets fro m late March to the middle of June for its regular sessions.
  Revenue Estimating Conference, Official Forecast, document from Fiscal Div ision, Louisiana House of
  Based on FEMA and Red Cross surveys and inspections. These numbers are subject to change as more
house to house inspections are made.
  Federal Emergency Management Administration, January 27, 2006.
  Lou isiana Depart ment of Natural Resources and Energy Information Ad min istration.
  Energy Informat ion Administration, US Depart ment of Energy.

____________________________________________________ __________________________________
                                Economic Outlook Page 85
affected by Rita, and video poker scattered around the state. The land based casino in
New Orleans 10 and the riverboats in New Orleans were closed and two riverboats in Lake
Charles were severely damaged and the others were shut down temporarily. 11

         Revenues estimates were revised based on secondary information such as
employment and population information, the substantial increase in the unemployment
rolls, the reduction in oil and gas production, the projected loss of gaming activities, and
other economic-related information. Economists in the state were concerned that
Louisiana, especially because of Katrina, would not follow the same economic pattern of
other states in which a natural disaster strikes. Homes, businesses, and social institutions
were destroyed, and then the state quickly begins rebuilding. The rule of thumb is that
natural disasters first create misery and then opportunity. In most natural disasters it is
not uncommon to experience a substantial increase in revenues because of the increase in
spending in the state from federal assistance to insurance payouts.

       The May 16 estimates for fiscal 2005-06 and the October 28 revised estimates are
compared in Table 10. Major reductions in revenue estimates were made in personal
income taxes, corporate taxes, general sales taxes, and gaming revenues. These estimates
were reduced because of the loss of a large base of the Louisiana economy. Gaming
revenues were reduced due to the loss of the land-based casino and the shutdown of
several riverboats. Mineral revenues were increased due to the higher price of oil and
natural gas than had been estimated in May 2005. The October estimates had the
proportion of dollars from the general sales taxes and mineral revenues increasing and the
proportion of dollars from all other revenue sources decreasing, as illustrated in Table 10.
The REC ultimately recommended a reduction in the official revenue estimate for 2005-
06 from $9.005 billion to $8.114 billion, a 9.9 percent reduction.

        The concerns for a reduction in revenues turned out to be false. By February
2006 it was clear the revenues were returning to and exceeding their pre-Katrina
estimates. In fact, in February the REC met and increased the revenue projections to
$8.95 billion or just about the same number that had been estimated in May 2005. By
the end of the year, actual revenue collections had risen to almost $10.5 billion.
Revenues in Louisiana followed exactly the same pattern as revenues in other states that
incurred major natural disasters.     The degree of damage due to Katrina and Rita
exaggerated the revenue increases instead of hampering the revenue collections.

   The land-based casino in New Orleans has a contract with the state to pay at least $60 million per year
regardless of its business activities. The state had projected revenues of $74.4 million fro m the land -based
casino in 2005-06 so the loss of the casino, at the maximu m, could cost the state $14.4 million, not $74.4
   Testimony before Louisiana Revenue Estimat ing Conference.

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                                Economic Outlook Page 86
                                        Table 10
                    Revenue Estimates for Louisiana for Fiscal 2005-06
                    As Determined by Revenue Estimating Conference
                     May 2005, October 2005, and Actual Collections
                      May 16, 2005                 October 28, 2005             Actual Collections in
     Taxes              Estimates                      Estimates                       2005-06
                      (in b illions)                 (in b illions)                 (in b illions)
     Total               $9.005                         $8.115                        $10.495
Source: Official Estimates of Revenue Estimating Conference, Fisca l Division,
Louisiana House of Representatives

         The recovery process accelerated the collection of sales taxes from people buying
new appliances, new furniture, new clothes, and new vehicles. Individuals have also had
additional money from the Federal Emergency Management Administration (FEMA) and
the Red Cross. In addition, gaming revenues rose despite the fact several gaming
facilities were severely damaged. The rising gaming revenues may be the result of relief
workers participating in the gaming activities, the fact that Mississippi had lost, at least
temporarily, all of its gaming facilities so Mississippi customers came to Louisiana, and
perhaps some people used their FEMA money to gamble. 12 The average dollars lost by
each participant in gaming activities increased from about $60 per outing to almost $100
per outing. 13 The state’s personal income tax collections rose despite the fact that over
300,000 new unemployment claims were posted just after Katrina. Oil and gas
production came back and energy prices stayed high for the entire fiscal year so oil and
gas revenues also rose.

        During fiscal 2005-06 the state’s next step was to plan a budget for 2006-07. The
revenue estimates were based on judgments about the pace of recovery, the continuation
of spending by consumers and businesses, the return of the state’s population, and other
factors of which there are no historical pattern on which to base projections. The sales tax
base has been ratcheted up because of the purchase of appliances, fur niture, cars, clothes,
and other items purchased to get families back to normalcy. These expenditures, and
hence the sales tax base, are not necessarily recurring. The sales tax base is in transition.
Establishing the actual sales tax base is difficult because tax data are not broken down in
such detail. After establishing the sales tax base, the rate of growth of a known sales tax
base must be selected. This rate of growth will depend on the recovery rate of the most
seriously damaged parishes. This rate of recovery is yet to be determined.

        The number of persons who actually returned to Louisiana as well as the types of
jobs that were available for these persons had an impact on personal income tax
collections. The number of persons working in Louisiana, including relief workers,
would determine taxes collected from tobacco, beer and alcoholic beverages, gaming, and
general sales tax. The state was starting over again in creating a n historical record by

   All of the Mississippi riverboats were shutdown due to Katrina. In December two riverboats opened up
and one other casino opened in January.
   Informat ion fro m Louisiana Legislative Fiscal Office.

____________________________________________________ __________________________________
                                Economic Outlook Page 87
which to project its revenues. This is especially true for the tax base for personal income
taxes and general and selective sales taxes, tax---collections that are paid directly by the
citizens of the state and persons working in a state. Revenue estimates for 2006-07 are
illustrated in Table 11. The state was expected to have more money in 2006-07 than it
did in 2005-06, but not more than it had originally expected to have for 2005-06 based on
May 2005 estimates. 14 As it has turned out, the initial revenue estimates for 2006-07
were much too low. The state collected over $11 billion in tax collections in fiscal
2007—this was due to rising oil and gas prices and the continued surge from hurricane

                                        Table 11
                   Revenue Estimates for Louisiana for Fiscal 2006-2007
                    As Determined by Revenue Estimating Conference
                    October 2005 , May 2006, and Actual Collections
                    October 28, 2005                    May 2006                      Fiscal 2007
     Taxes        Estimates for 2006-07           Estimates for 2006-07            Actual Collections
                       (in b illions)                  (in b illions)                 (in b illions)
     Total                $8.644                          $8.722                        $11.688
       Source: Official Estimates of Revenue Estimating Conference, Fiscal Division,
Louisiana House of Representatives

         The Regular 2007 Session of the State Legislature had the following funds to
appropriate: (1) a $827 million surplus left over from fiscal 2005-06; (2) non-
appropriated funds of almost $1.6 billion from the extra revenues being generated in
2006-07; and, (3) an additional $1.4 billion to be appropriated for fiscal year 2007-08---
this latter figure is the difference between the revenue projection for 2007-08 less the
recurring spending obligations as defined in the 2006-07 budget. In total the state had
over $3.8 billion to spend during the 2007 Regular Session.

Fiscal 2008, 2009, and Beyond and a Ne w Hurricane

        The major concern after fiscal 2007 was would the revenue growth continue,
would it flatten out; or would it decline? This continues to be the forecasting concern.
These forecasts are important because it affects how the state spends the money. The
state can put most of the money into one-time projects thereby not creating a long-term
financial obligation for the state or it can put much of the money into recurring programs
or tax cuts thereby creating a long-term financial obligation for future governors and
legislators and the citizens of the state.

        In fiscal 2008 the preliminary estimate of actual state tax collections is $11.9
billion or an increase of about $200 million over 2006-07. The sobering note is that the
May 2008 estimate of total tax collections for fiscal 2008 is only about $60 million lower

   The Governor included a $1,500 pay increase for all elementary and secondary public school teachers
and a 5 percent pay increase for all faculty members at institutes of higher education. The can be found in
the Louisiana Executive Budget, Louisiana Division of Ad ministration.

____________________________________________________ __________________________________
                                Economic Outlook Page 88
than what is now expected in September 2008.          This is very different from what
happened in fiscal 2006 and fiscal 2007, both times in which even in May of 2006 the
estimates for fiscal 2006 were still off by over $500 million and the same was true in
fiscal 2007. Revenues, due to energy prices and the hurricane surge, kept growing at
rates that were unsustainable and the revenue forecasts just could not keep up with these
unsustainable growth rates. Now the growth rates are much more sustainable.

        In other words, do not expect continued revenue increases because of Katrina and
Rita and recognize that oil prices are now weakening, even in the aftermath of Hurricane

Issues for State Revenues for 2010 and Beyond

       The state’s economy is always in motion. Something is happening that will bump
revenues up or possibly cause a decline in revenues. There are several factors on the
horizon at this time.

         First, Hurricane Gustav created a major evacuation, some temporary closure of
businesses, the loss of property, and inconvenience for a large part of Louisiana. Gustav
will have none of the multi- year impacts that Katrina had. A detailed analysis of the cost
of Gustav follows this revenue analysis. There will short term surges of sales tax
collections but this will be a two to three month phenomenon. Oil prices jumped for
about a day and, then when it was discovered that no major damage had been incurred by
the offshore rigs, prices started their decline again. The state handled Gustav superbly—
it minimized the damage to people and property. It is just not reasonable to expect the
state to get another windfall from Gustav in terms of revenue collections.

        Second, oil prices and natural gas prices will play a major role in revenue
collections for the state general fund. Up until fiscal 2006 the state only spent $850
million of its mineral revenues on the state general fund; anything above $850 million
went into the Rainy Day Trust Fund. The Trust Fund is now full so every dollar of
mineral revenues, with the exception of those dollars that are constitutionally dedicated,
will go directly into the State General Fund to be spent at the discretion of the Louisiana
Legislature and Governor. This makes the state vulnerable to major swings in oil and
gas prices.     This is one reason the Revenue Estimating Conference has been very
cautious in establishing oil and gas prices in outer years. Most experts do not believe
that the long-term market equilibrium price for oil is $125 per barrel or even $100 per
barrel. In fact, in this forecast we establish a range of oil prices from $80 to $100 per
barrel. Oil prices are volatile. Forecasts are subject to large margins of error.

        Third, the state has incorporated several major tax cuts in the last two legislative
sessions, including rollback some of the personal income tax increases approved by the
voters in 2002---namely, allowing Louisiana citizens to take excess itemized deductions
in calculating Louisiana taxable income (this was done in the 2007 Session) and
augmenting the tax bracket from $25,000 to $50,000 to $25,000 to $100,000 at the 4
percent tax bracket (in the 2008 Legislative Session). Over time these acts of the State

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                                Economic Outlook Page 89
Legislature will have an impact of almost $800 million on personal income tax
collections. This is a choice the state made. It now has to work within the new fiscal
constraints that it will face.

         Fourth, the continued surge in sales tax collections from Katrina does not appear
realistic. Local governments in the southern parishes had large increases in sales tax
collections after Katrina. These local governments are not experiencing the large growth
rates. It is still true that the level of tax collections appears to be sustainable, but the
growth rates are not. The state’s sales tax collections are mirroring the local conditions.
In fiscal 2008 general sales tax collections rose by 0.9 percent, a far cry from the double
digit increases in previous years.

        Finally, in 2010 the federal government will have to make some major decisions
about federal taxes. Many of the tax cuts passed in 2001 and 2003 will automatically
expire unless there is an act of Congress to extend them or make them permanent. The
tax cuts in 2001 and 2003, in addition to whatever effect they had on individual economic
behavior, had a positive impact on Louisiana personal income tax collections. If these
tax cuts expire, then the federal tax collections will cause state tax collections to decline.
The state has no role, other than as citizens voicing an opinion on federal tax policy, on
this decision that will have a major impact on the state personal tax collections.

Revenues and Budget Policy

        The REC handled the potential damage to the revenue stream in Louisiana
because of Katrina and Rita very prudently. It did not want the state to incur a large
shortfall after most state agencies had spent its funds for 2005-06. In the end, the
revenue projections were simply wrong. This is one of the co nflicts that the REC has.
The duty of the REC is to establish the official forecasts for the state, not set budget
policy. Yet, there is a bit of budget policy in every forecast. There is no doubt the
reduction in revenue projections in October 2005 just after Katrina included a very
prudent approach to handling the state finances after such a storm and also included a
great deal of uncertainty about what might happened to the state’s economy.

       The REC now has to make 3 to 5 years forecasts taking into account the volatility
of the energy markets, guesses about what the new President and Congress will do
regarding federal tax policy, and the basic economic foundation of the Louisiana

                         IMPACT OF HURRICANE GUSTAV

       On September 1, 2008, Gustav made landfall in Terrebonne Parish as a strong
Category 2 hurricane. Hurricane Gustav moved northwest into central Louisiana, leaving
widespread physical damage and power outages in the majority of parishes in Louisiana.
Flooding occurred on a smaller scale.

     Very preliminary estimates from Louisiana Department of Economic Development
(LDED) put property damage for Louisiana in $7 billion to $15 billion range including both

____________________________________________________ __________________________________
                                Economic Outlook Page 90
insured and uninsured losses. Early projections from insurance companies place insured
losses in the $1-$3 billion range, suggesting that estimates of property damage may tend to
fall nearer the lower end of this range. The discrepancy in part reflects the fact that up to
50% of residential housing losses will be uninsured. In addition, the insurance losses fail to
account for agriculture, timber, and fisheries losses and damage to public infrastructure and
facilities. Kurt Guidry of the LSU AgCenter’s preliminary estimates of crop losses were
$372.3 million or 10.2% of the anticipated 2008 crop value with up to $60 million in
additional losses for Louisiana fisheries and aquaculture.

         Hurricane Gustav may also differ from many storms in that the business interruption
losses due to power outages may be quite high relative to property losses. Not surprisingly,
when Gustav turned off the power to Exxon Mobil, Northrop Grumman, and most other
Louisiana businesses, the state’s production of output and revenue generation plummeted.
The US Bureau of Economic Analysis places Louisiana Gross State Product at just under
$600 million per day. On the day Gustav hit, over $500 million of Louisiana output was lost.
Initial estimates place the total lost output of Louisiana businesses at $2.5 -$5 billion. Those
losses can also be expressed in terms of lost worker productivity. Initial LED projections
place lost worker productivity between $650 million and $1.3 billion. For many hourly
workers, this lost worker productivity will be felt immediately in the form of lost wages. In
other cases, particularly for large firms, firm’s will continue to pay workers and the loss will
appear either as a reduction in earnings.

        The impact of the storm on Louisiana’s economy depends to a large extent on the
Federal government and insurance response to Hurricane Gustav. At this early juncture, we
expect Hurricane Gustav to have a minor impact on our 2008 forecasts for the New
Orleans, Baton Rouge, Houma and Lafayette MSAs, but it should not materially alter our
forecasts in any region for 2009-10.

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                                Economic Outlook Page 91

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