At a loss for economic evaluation
Hurricane Katrina left economists at a loss trying to gauge its economic impact.
"Katrina is something new," says Joel Naroff, president of Naroff Economic Advisors. "Until the levee broke, most economists had a reasonable way of evaluating a natural disaster like this. This time we have the effects on the energy sector and a city under water, which is something we have no idea how to evaluate."
Typically, large natural disasters like hurricanes have a profound short-term negative effect on the economy, but, as insurance settlements and federal relief kick in and spur home rebuilding and repair as well as restocking of inventories and refrigerators, the long-term effects are muted. In fact, hurricanes often boost economic growth in the longer run.
Katrina, however, may be different. Merrill Lynch estimates the total damage from the storm will be around $40 billion, with a third of that uninsured. Long-lasting damage to tourism and convention business in the region may have a big impact on September hiring and employment data. In addition, several of the nation's largest ports, including New Orleans, South Louisiana, and Mobile, Ala., have been disrupted by the hurricane. Something like a fifth of the nation's imports and exports move through ports in the affected region.
But the fact that Katrina hit a major center of the U.S. oil industry—over a quarter of U.S. oil production is in the Gulf of Mexico, not to mention a large concentration of delivery and refining facilities—makes this storm different. That's especially true given that global excess oil capacity is less than 1.5 million barrels per day.
"That leaves world energy markets vulnerable to a sharp disruption—one just like Katrina," says Richard DeKaser, chief economist at National City Corp.
The ultimate effect the storm will have on energy prices is still uncertain, says Naroff, which makes Katrina's impact on the national economy difficult to predict. "I don't know how high energy costs will go and how long they'll stay there," he says. As of midday Wednesday, the price of a barrel of crude oil for October delivery was hovering between $69 and $70. Gasoline prices continue to rise—a gallon of unleaded averaged $2.62 by early Wednesday—and energy experts were predicting that most Americans would soon have to pay more than $3 a gallon. Some experts predicted a brief spike above $4 a gallon.
Considerably higher prices at the pump will cut into consumer spending and shave at least a few tenths of a percentage point off the growth in gross domestic product in the fourth quarter, says DeKaser. He has yet to remodel his fourth-quarter forecast but says it will be closer to 3 percent growth, down from his previous estimate of 3.3 percent. Naroff is more pessimistic. "We're talking about growth in the 2 to 3 percent range instead of the 3 to 5 percent range," he says.
Despite its impact, neither economist expects Katrina to push the economy into recession. "This is not a tipping event," says DeKaser.
Katrina's effect on Federal Reserve policy, says Philadelphia Federal Reserve Bank President Anthony Santomero, is "complex and difficult to predict." The storm and its aftermath will slow the economy, yet rising energy prices will no doubt add to inflation. Luckily, the Fed's committee that sets interest rates, the Federal Open Market Committee, doesn't meet again until September 20. That will give the central bank's economists time to collect information about Katrina's aftermath and settle on the appropriate interest-rate policy.
"FOMC members will really earn their money over the next few months," says Naroff.