September 6, 2005 (Atlanta) - Typically, the impact of a hurricane on the nation's economy is insignificant. However, nothing about hurricane Katrina has been typical. According to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at the J. Mack Robinson College of Business at Georgia State, "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," says Dhawan. "In addition, the refugee crisis will sharply affect consumer confidence in September and October. I expect this combination to negatively impact the nation's economy through the end of this year."
According to Dhawan's "Quick and Dirty Analysis" of Katrina's impact, the expectation is that refineries will be back online by the end of the week. However, it will take a few weeks for them to operate at full capacity which means it will be another few weeks after supplies are normalized for prices to come down at the pump. Assuming no delays, Dhawan sees this scenario happening by early October.
"Unfortunately, the loss of Gulf oil production will linger a bit longer," says Dhawan. "It may take over 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 this quarter and in the fourth quarter 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 their hands. Unlike the oil embargo in the 70's 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 which 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% in the 2nd half of 2005 instead of pre-hurricane forecast of 3.6%, a drop of 0.7%. The biggest change is in the 4th quarter 2005 GDP growth estimate that has been downgraded by 0.9%. 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%.
Although Katrina's impact is not expected to be substantial over the long-term, factors such as another hurricane hit and negative psychological effect of the refugee crisis lasting longer are two unknowns that can increase the damage estimates.
