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National
and Regional Outlook
Given the vast amount of damage caused by Hurricane Katrina this section of
the report will be devoted to the economic impacts of this historic storm.
Before Katrina's arrival on our gulf shores the
U.S.
economy was growing above a 3 percent rate per year. The unemployment rate
was falling and payrolls were expanding. Moreover, interest rates, while
trending upward, remain at relatively low levels. This is good news because
these conditions will help buffer the U.S. economy from the negative effects
of the storm.
Most
analysts believe that the direct impact of the storm is not sufficient to push
the economy into recession. For example, if the economy is growing at around
330 billion dollars per year and the storm's direct economic impact is 100
billion dollars, the economy will slow, but not go into recession. However,
economists are concerned with the secondary effects of Hurricane Katrina.
These items can best be described as the economic aftershocks of the storm.
The economic aftershocks of the storm create a so called negative multiplier
effect that has the potential to do additional harm to the economy. Under
worst case scenario, these ripples might be capable of pushing the economy
into recession. However, most economic analysts do not see this happening.
Katrina is most likely to go down in history as the most expensive natural
disaster ever to impact the
U.S.
The Congressional Budget Office estimates that 400,000 jobs will be lost this
year because of the storm. In addition, Wall Street forecasts believe the
storm will cut as much as 1.5 percent from GDP growth in 2005. Some economic
analysts are already putting the economic loss at above 100 billion dollars.
This, of course, does not even take into account the suffering and human
tragedy caused by the storm. Given the magnitude of Hurricane Katrina, what
are the likely ripple effects?
New Orleans
and the gulf area are of great strategic importance to the U.S. New Orleans
is the largest port in the
U.S.
The eastern third of the country, and, in particular, the
Midwest relies on the
Mississippi
River and the port of New Orleans to get exports out of the country and
imports into our heartland. To the extent that this transportation link to
the rest of the world has been damaged or greatly impaired, businesses engaged
in exporting activity will experience a reduction in sales revenue. This
could mean inventory buildups and eventually employment layoffs at those
firms.
The
offshore oil fields and refinery capacity of this region is vital to the
overall economic health of the
U.S.
economy. With the demand for oil and other energy sources already being
pushed up by strong world-wide economy it is easy to understand how any
disruptions would place a great deal of upward pressure on the prices of most
energy sources. The impact of gasoline, heating oil, natural gas, and
electricity prices are already rippling throughout the economy. Business
firms and consumers will have to make some hard choices as to how much of
their income they are willing to allocate to energy purchases. These choices
will cause changes to their normal spending patterns and impact businesses and
workers alike. Unfortunately, this rise in energy prices comes at a time when
the average U.S. household savings rate hovers at around zero percent and
personal debt is at record levels. In other words, households will have to
make some tough decisions.
Another
issue related to higher energy prices and the disruption of the flow of cheap
imports is the overall inflation rate. The aforementioned items will clearly
put pressure on the overall price level. This puts the Federal Reserve and
Alan Greenspan in a difficult position. If they ease credit conditions in an
attempt to keep the economy afloat they run a real risk of contributing to
spiraling inflation. In the long-run this is a worse outcome than allowing a
brief recession to occur. On the other hand, if the Federal Reserve tightens
up on credit conditions and increases interest rates in an attempt to curb
inflation they run the risk of driving up interest cost to consumers and
businesses. Given the large amount of adjustable rate debt that households
are carrying they will be squeezed by higher debt payments and be forced to
cut down on their consumption of other goods and services. Once again, we
will have a ripple effect impacting the economy.
It has been often said that Wisconsin's economic performance is highly
predicated on energy prices and the level of interest rates. We are an energy
importing state and our economy is dominated by the interest rate sensitive
manufacturing sector. The more quickly the dissipation of the after effects
of Katrina, the better off the Wisconsin economy will be. History has taught
us that natural disasters, no matter how terrible, eventually play themselves
out. In the case of Katrina, it could be a decade before New Orleans
resembles its former self. History has also taught us that there is usually a
flurry of spending that takes place after a disaster. This spending is a
stimulus to the economy and helps to offset the negative effects mentioned
earlier. The very act of rebuilding is perhaps the key to avoiding a
recession and why most economists do not see Katrina pushing the U.S. into
recession. This, however, does not mean that the economic impact of the storm
will not be felt by the country. |
