Thursday, September 08, 2005

What will the Effect on GDP be for Katrina?

From Adam Samwick:

Significant but not Overwhelming

So says the Congressional Budget Office in its preliminary report on the likely economic impact of Hurricane Katrina on economic growth.
I'm not sure I can agree. I think that there will be three effects:

1. The rise in energy prices is equivalent to at least a $10 rise and if you add in natural gas, I think you could easily argue that this is effectively the same as a $20 rise. This could dampen GDP by 1%.

2. The unemployment and productivity loss due to jobs and businesses just being obliterated. Assuming that this is somewhere in the neighborhood of the CBO's 400,000 jobs (I think this is a low estimate)., they only suggest this represents between 1/2 and 1%, but I think that is way too optimistic. I think you could easily see and impact of 2%, but let's assume 1% for the sake of discussion. I don't see how you escape some collateral damage in the agricultural segments so I think you have to say that 1% is low.

3. Finally, consumer and investory confidence could be shaken. If this effect is moderately large then rather than the outcome could be a mild recession.

Depending on what you think about a short mild recession with another very slow employment recovery, that
may or may not qualify for "significant, but not overwhelming".


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