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Economic Impact of Hurricane Expected To Be Modest

Economic Impact of Hurricane Expected To Be Modest

Bush administration moves to mitigate possible fuel supply disruptions

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- The impact of Hurricane Katrina on the U.S. economy is likely to be moderate, current and former U.S. officials agree.

Ben Bernanke, chairman of the White House Council of Economic Advisers, says that the hurricane, which U.S. officials called one of the worst if not the worst disaster in the U.S. history, will have a strong effect on economies of Louisiana, Mississippi, Alabama and Florida. But the entire economy will suffer much less, he said in several press interviews.

“As long as there’s not permanent damage to our energy infrastructure, the effects on the overall economy should be fairly modest,” Bernanke said.

Former Treasury Secretary Paul O’Neill struck a similar note of cautious optimism in an interview with a major TV network.

“I don’t see anything that’s going to derail the general path of the economy,” he told CNBC.

President of the Federal Reserve Bank of Philadelphia Anthony Santomero said that, after a short period of economic disruption, the “effects of Katrina are likely to slow but not stall the forward progress of the national economy.”

Making accurate projections about the Katrina’s economic impact is difficult because both the extent of the damage and the time necessary to restart major industries in the affected region are hard to assess. Private estimates of a likely reduction in U.S. growth rates range from several tenths of a percentage point to a full percentage point in the third and fourth quarter of 2005.

The U.S. government has launched one of the largest domestic response mobilizations in U.S. history to repair the damage caused by Hurricane Katrina.

ECONOMISTS’ VIEWS

Brian Wesbury, an economist with the investment firm Claymore Securities, says that the damage could run into billion of dollars and that ripple effects from the disaster will be felt throughout the entire economy. Historically, the effects of regional disasters and catastrophes on the overall economy have been more or less negligible, he said in a September 1 interview.

“When you look back to times when major cataclysms took place in this country it is very difficult to tell by looking at economic data that something bad actually happened,” he said. “The damage is rarely evident.”

Another private economist agrees. Nariman Behravesh of Global Insight, an economic research and forecasting firm, said that, typically, damage to the economy from a major hurricane pushes down growth at the national level by few tenths of a percentage point.

But Katrina was a much larger storm and its effects are likely to be greater, he said in an interview on the same day.

“The damage assessments from the oil rigs in the Gulf of Mexico and the refinery shutdowns are more serious then we initially thought,” he said.

Behravesh and other private economists say that the rate of repair of energy infrastructure and recovery of the energy sector in the region will bear in a major way on the overall economic expansion.

The hurricane has disrupted the production of oil and natural gas in the Gulf of Mexico and shut down eight of 14 oil refineries along the coast, pushing up prices of gasoline and other fuels that had been rising even before the disaster, according to news reports.

The Bush administration decided August 31 to lend some oil from the Strategic Petroleum Reserve (SPR) to a refinery and is considering applications for more oil releases from the SPR to others. It also temporarily relaxed anti-pollution gasoline and diesel fuel standards to ensure that the hurricane does not result in “serious fuel supply interruptions in the country,” as Environmental and Protection Agency Administrator Stephen Johnson said.

Some private economists are concerned that a surge in gasoline prices stemming from limited supplies could reduce consumer expenditures, thus slowing down the economy, but Wesbury said that the impact of any reduction in consumer spending on the overall economy will be mitigated by rising profits of oil companies.

Behravesh said, however, that the hurricane damage is not limited to energy infrastructure. He said that disruptions from the storm at the port of New Orleans, which is the second largest port in the United States, will affect exports, particularly exports of agricultural products, and imports “by a substantial amount for at least few weeks.”

Wesbury agreed that New Orleans is a very important port, but said that the United States has an incredible depth of resources and wealth. Slowdowns caused by natural disasters are followed by a recovery driven by reconstruction efforts, he added.

“So the net impact is relatively small,” he said.

Wesbury said that the U.S. economy has shown throughout the history to be “extremely” resilient, weathering the September 11, 2001, terrorist attacks and major natural disasters.

Santomero, a member of an interest-rate-setting body of the Federal Reserve, the U.S. central bank, made a similar point in an August 31 speech at Temple University. He said that because the U.S. economy has a proven record of absorbing such shocks, the Federal Open Market Committee is likely to continue raising key interest rates at a “measured pace.”

If, however, the economic data indicate a more substantial impact of Hurricane Katrina on growth, the bank will consider holding to the existing rates for some time to give the economy a break, he said.

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