Hurricane Rita will join Katrina in damaging the U.S. economy warns BMO Nesbitt Burns in a new report.

“With the havoc wreaked by Hurricane Katrina still lingering and having a fundamental impact on global energy markets, the last thing the already-tight energy markets need is another hurricane. But another one is what we are getting, this time Rita, now upgraded to a category 5, the strongest force possible and its breadth is widening,” BMO Nesbitt says. “This is the third largest storm in history and the biggest storm to hit the region.”

“While weather forecasting is not our field, the experts say that Rita is zooming towards oil-rich Texas and could reach landfall anywhere along the Texas Gulf coast, but with hurricanes anything is still possible,” it notes, pointing out that Texas, is a key American oil and gas producing region, representing 30% of oil production capacity, 28% of natural gas processing capacity and about 26% of the nation’s refining capacity. Also, refineries in Texas are bigger than in Louisiana. “Companies are already evacuating oil and gas platforms in the Gulf of Mexico and eight refineries are shutting down in the greater Houston and Galveston regions. Residents of coastal cities and towns are now ordered to evacuate and officials at a Texas nuclear power plant in the path of Hurricane Rita prepared Wednesday to shut down two reactors,” it reports.

“Weather and energy experts say that as seriously Hurricane Katrina hit the nation’s supply of gasoline, Hurricane Rita could be worse,” it says. “The damage from Katrina was focused on offshore oil platforms and ports. Now, the greater risk is to oil-refinery capacity, especially if Rita slams into Houston, Galveston and Port Arthur, Texas.”

The reaction of non-energy commodities should be mixed, BMO predicts. “Gold should continue to rally from its 18-year high, in part based on Katrina-induced widening of the U.S. current account deficit, a larger budget deficit, and some firming in inflationary expectations,” it says. “We can suggest that potential reconstruction spending will be good news for industrial materials and steel demand. Steel, lumber and zinc, as well as gold, have already seen a Katrina-related bump-up in price in recent weeks, and it is reasonable to assume that prices could move higher into next year.”

“In Canada, consumers already spend over 6.5% on energy, so even higher prices that could result from Rita will stress the consumer even further, likely crowding out other spending and eventually moderating economic growth,” it says. “However, as Canada is a big net exporter of natural gas and oil, the country as a whole stands to benefit from these high prices. This should help generate an even bigger budgetary surplus in Alberta and fortify the federal government’s finances as well.”

“This can’t help but further damage consumer and business confidence. U.S. fiscal deficits will be that much bigger and inflation pressures could mount further,” BMO concludes. “A million people along the Texas coast are now forced to flee and some are double-evacuees from Louisiana. This, coupled with the rise in fuel prices, can’t help but dampen economic activity, at least temporarily. This is not good for most U.S. stocks, but bonds could rally further on the expectation of slower growth.”