Hurricane Katrina to reduce employment - East Valley Tribune: Hurricanekatrina

Hurricane Katrina to reduce employment

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Posted: Wednesday, September 7, 2005 5:51 pm | Updated: 9:39 am, Fri Oct 7, 2011.

WASHINGTON - Hurricane Katrina will have a greater economic impact than previous killer storms, though the energy price spikes, slower growth and job losses will not be enough to push the country into a recession.

That's the view of the Congressional Budget Office which on Wednesday provided the government's first assessment of the economic impact from the country's worst natural disaster.

The CBO predicted the aftermath of Katrina would see job losses of 400,000 in coming months, a reduction in growth of as much as a full percentage point in the second half of this year and that September gas prices will average about 40 percent higher than before the storm.

These impacts were described as "significant but not overwhelming." Still, the CBO cautioned that the economy could suffer a more serious blow if energy supply disruptions along the Gulf Coast last longer than expected.

"Last week, it appeared that larger economic disruptions 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 wrote in a letter to Senate Majority Leader Bill Frist, R-Tenn., and other congressional leaders.

The CBO gave a ballpark estimate that gasoline prices will peak in September at about 40 percent higher than levels in effect in midsummer. That peak could be near, given that the average retail price of regular unleaded gasoline climbed by 46 cents last week to $3.07 per gallon, 34 percent above the July nationwide average.

The spurt in the cost of gasoline will reduce overall economic growth by 0.4 percent in the current July-September quarter and by 0.9 percent in the October-December period as consumers cut back on spending in other areas by around $38 billion at an annualized rate, CBO estimated.

CBO said overall economic growth, as measured by the gross domestic product, could be reduced by between 0.5 percentage point and a full percentage point for the second half of this year but this downshift in growth should be temporary as long as gasoline prices retreat to pre-Katrina levels.

Before the hurricane, private economists were forecasting growth in the second half would come in between 3 percent and 4 percent following growth of 3.6 percent in the first half of this year.

There have been some promising signs on the energy front in recent days with crude oil prices dropping as more Gulf Coast production resumes. The Energy Department said Wednesday that domestic oil production and refinery output should return to pre-hurricane levels by November.

Private economists said they generally agreed with the CBO forecasts although they cautioned that the huge unknown remained oil prices.

"Energy is the big wild card. We just don't know where prices will be," said David Wyss, chief economist at Standard & Poor's in New York. "It will be a question of how fast oil refineries and oil pipelines come back."

The CBO said estimates of the impact on employment in September range from a decline of 150,000 jobs to a drop of as many as half a million jobs. Some of that impact, however, will be offset in coming months, CBO said, predicting that employment growth over the final four months of this year would be 400,000 below the 600,000 to 800,000 pre-Katrina estimates for payroll job growth from September through December.

The hurricane's ultimate impact on the budget was unclear, CBO said, however it noted that Congress already has approved $10.5 billion in emergency spending with more on the way. The White House announced Wednesday that President Bush will ask lawmakers to approve another $51.8 billion to cover the costs of federal recovery efforts.

Many private budget experts are predicting increased federal spending for Katrina will push up next year's deficit by $100 billion or more, putting in jeopardy Bush's efforts to cut the deficit in half by 2009.

Holtz-Eakin said in his letter to congressional leaders that the adverse impacts from Katrina should be concentrated in the second half of this year and he said economic activity could receive a boost next year from rebuilding.

However, he cautioned that the positive impacts could take longer to be felt because rebuilding may take longer to get started this time around given the extensive damage, especially in New Orleans.

Mark Zandi, chief economist at Economy.com, said the CBO's forecast was in line with his own estimates of the economic impacts. He said he saw growth being reduced by 0.75 percentage point in the second half of this year and being boosted by a similar 0.75 percentage point in the first half of next year as massive spending to rebuild destroyed homes and businesses kicks in.

The CBO report said the economy of Louisiana was about 1.2 percent of the U.S. economy and Mississippi was about 0.7 percent of the national economy. It said it was too pessimistic to assume that half of the output in both states would be lost for three months.

"Presumably some people in New Orleans and other parts of the coast will be able to return to work in one or two months, and construction employment will be picking up during the fourth quarter," the CBO said.

The report said the main areas expected to experience "prolonged and substantial disruption of economic activity" are the New Orleans-Metairie-Kenner metropolitan area of Louisiana and the Gulfport-Biloxi and Pascagoula areas of Mississippi.

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