vol. XVII no. 5

				O v e r a l l   H a r m   L o w ,   B u t   U . S .   E c o m o m y W i l l   F e e l   H u r r i c a n e ' s   E f f e c t s     -- Rajeev Dhawan       Director of the Robinson College of Business       Economic Forecasting Center Typically, the impact of a hurricane on the nation’s economy is insignificant. However, nothing about the recent hurricanes has been typical. Katrina’s impact will be felt on a national level and through many channels. Because New Orleans is so important in oil, gasoline production and shipping in the Mississippi River, we can expect an immediate impact on consumer’s discretionary spending. In addition, the refugee crisis will sharply affect consumer con-fidence. I expect this combination to negatively impact the nation’s economy through the end of this year. While oil prices will normalize by early October, the effects of the loss of Gulf oil production will linger a bit longer. It may take more than three months to get some kind of production flowing out from the Gulf to the refineries located there. This will keep oil prices in the $65–$70 per barrel range until December. Revised forecast based on Katrina’s impact: Consumer confidence takes a hit in the third and fourth quarters, but as New Orleans starts on the road to recovery, consumer confidence will be restored in 2006. The FED will stay the course of measured rate hikes since high inflation in the coming months will tie its hands. Unlike the oil embargo in the ’70s, the current oil supply problem is a temporary shock, so by staying the course, the FED will be able to guide the economy out of this travesty. For the next few months, there will be a flight to liquidity that will keep the 10-year bond from rising even though inflation pressures are present. This actually moderates the negative effect of reduced confidence. Real GDP growth is 2.9 percent in the second half of 2005 instead of prehurricane forecast of 3.6 percent, a drop of 0.7 percent. The biggest change is in the fourth quarter 2005 GDP growth estimate that has been downgraded by 0.9 percent. This drop fades away by mid-2006, when rebuilding is in full swing. On an annual basis the hit to GDP in 2005 and 2006 is 0.2 percent. Although the impact of the recent hurricanes is not expected to be substantial over the long term, factors such as other hurricanes and the negative psychological effect of the refugee crisis lasting longer are two unknowns that can increase the damage estimates. Top

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