Katrina and the Economy

Considering the U.S. economy slammed on the brakes in early 2001, recently it actually seemed to be saying, "laissez les bons temps rouler." We had high oil prices, no more budget surplus, and a big trade deficit, to be sure. But the administration had been trying to get key indicators up -- GDP, unemployment, inflation -- to bolster public confidence in the economy and the Republicans in charge of it.

After all, there's an election coming up. Then along comes Katrina with the potential to mess it all up again.

"Overall, there seem to be three broad effects: an employment effect, a gas price effect, and a rebuilding effect," wrote Dr. David Kelly, Senior Economic Advisor at Putnam Investments, in "The Economic Cost of Katrina" issued 6 Sept 2005.

The loss of jobs in the affected states is likely to raise unemployment by 1/4 point, or 350,000 jobs, Kelly said. But the specific loss of production from oil and gas operations along the Gulf is likely to hurt GDP more than the loss of low-income jobs will hurt consumer spending.

That's because earnings in that region are only 80% of the national average. But there's now a disproportionate allocation of household income/savings to buy gas at rising prices, which means postponing other purchases, nationwide.

Massive government spending to rebuild will soon stir the economic potpourri and make things smell a bit rosier than they are.

"One of the ironies of natural disasters is that they often add to economic growth, since a loss in wealth does not show up in the national income statistics, but rebuilding efforts do," Kelly wrote.

"All told, if the government response is swift, and if gasoline prices fall back relatively quickly, the economy should maintain most of the momentum it had eight days ago. GDP growth in the second half of 2005 may look more like 2.5% to 3.0% rather than the 3.0% to 3.5% which had looked likely earlier. However, as rebuilding gets into full swing economic growth should accelerate in early 2006."

Just in time for mid-term elections.

The Economist agrees:

"History suggests that the hurricane will have little effect on the national economy. Despite all the pictures of sinking hotels and flooded convention centres, the overall impact of natural disasters is often close to neutral..."

However, Katrina shut down 90% of the oil rigs in a critical region for that industry, according to coverage by The Economist. Panic sent the price of crude over $70 until Bush "loaned" some to the oil companies from the nation's strategic petroleum reserves.

Watch for more federal support for building new refineries, along the lines of what we heard earlier this year. Also watch for political spin, said The Economist:

"Beware any talk from the president about the disaster somehow underlining his fraudulent campaign to boost America's energy security. It doesn't. The United States will remain reliant on foreign sources of energy."

As for what to do now, Kelly concluded by saying that "long-term investment advice which seemed correct eight days ago still seems correct today, namely, to have a balanced portfolio of long-term investments, with small overweights toward stocks over bonds, international over domestic, large-cap over small-cap, and growth over value."


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