Katrina unlikely to derail national economy

Martin Wolk Chief economics correspondent • Profile • E-mail

Hurricane Katrina will slow U.S. economic growth in the second half of the year, but the devastating aftermath of the storm is unlikely to derail the expansion, according to government and private economists.

Many economists are estimating the storm and flooding will reduce U.S. growth by 0.5 percent to 1 percent in the second half of the year, but that will still leave the economy growing at a rate of 2.5 to 3.5 percent, a bit short of its long-term potential. Much if not all of the impact could be offset next year by billions of dollars in government and private funding for reconstruction and recovery.

While the resilient U.S. economy is unlikely to be tipped into recession, the hurricane clearly left a devastating toll on the region that will be reflected in national economic figures over coming months. Employment probably will be reduced by 400,000 jobs in coming months, according to the Congressional Budget Office report obtained by The Associated Press.

The CBO report said that Katrina’s impact was likely to be “significant but not overwhelming” to the overall U.S. economy, especially if energy production along the Gulf Coast returns to pre-hurricane levels quickly.

Because the economy has been adding jobs at a pace of fewer than 200,000 a month, the CBO figures imply that the nation's work force will shrink for at least two months, and the jobless rate will rise a bit from its current 4.9 percent.

Sharply higher energy prices are likely to be one of the longest-lasting effects of the storm,  forcing consumers to cut back on other spending or draw down their savings. Chicago Fed President Michael Moskow said Wednesday that the potential for rising inflation, exacerbated by Katrina, remains the biggest threat to the nation's economic outlook.

But analysts have been heartened that energy prices already have fallen back from last week's peak levels as refineries have gotten back on line. Oil prices fell sharply for a second straight day Wednesday, bringing the price of crude on New York markets to $64.37 a barrel, down 9 percent from last week's record peak of $70.85.

As a result, stock prices have jumped more than 1.5 percent over the past two sessions, with benchmark indexes rising to their highest levels since mid-August, well before Katrina made landfall on the Gulf Coast.

“Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely,” CBO Director Douglas Holtz-Eakin said in a letter to congressional leaders.

With up to $100 billion in damage to government infrastructure and private assets, Katrina is being compared by some analysts to the terrorist attacks of 9/11, which devastated Lower Manhattan and left several hundred thousand people jobless.

But despite the blow to consumer confidence, the economy bounced back in the months after the attack, emerging from a recession that began in March 2001, according to later assessments.

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This time around, the economy has been growing at a healthy rate of between 3 and 4 percent and is in an even better position to withstand the loss of jobs and production, analysts said.

“The background to when this hit is an economy that was doing quite well,” said John Silvia, chief economist for Wachovia Corp. “That’s a very, very different backdrop from 9/11.”

Analysts also have been encouraged that the government response is likely to be massive.

President Bush Wednesday requested another $51.8 billion in federal aid for the stricken region in addition to $10.5 billion approved last week.

Mark Zandi, chief economist for Economy.com, said the sharp criticism of the Bush administration and state and local agencies could spark a government response that is more massive than it would have been otherwise. He estimated that $50 billion in government and private aid and insurance compensation will pour into the region.

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