Katrina's "Unique" Economic Impact

This analysis was reported in a recent Business Week article. The report is truly sobbering. This parallels what I am hearing from other informed sources in the economic and business research community.

"This hurricane has at least three unusual features that will likely take additional bites out of third- and fourth-quarter GDP. The damage from Hurricane Katrina is still being tallied, but we at Action Economics have decided to take a first pass at gauging how wide a swath the storm will cut through U.S. economic output. In total, we're assuming it will subtract 0.7 percentage points from growth in gross domestic product in the third quarter, lowering the expected U.S. growth rate to 3.7%. We expect an additional 0.4 percentage point hit to the fourth quarter, with growth in that quarter now set at 3.9%. However, we forecast positive effects of 0.2 to 0.5 percentage points in each of the four quarters of 2006.

While most hurricanes have economic effects, Katrina has at least three unique factors: its impact on U.S. energy production; the related devastation of a major urban center, New Orleans; and the disruption of a vital transportation artery, the Mississippi River. Absent those factors, we might have expected a GDP subtraction of 0.3 percentage points from the third quarter, but a 0.1 percentage point positive impact in the fourth, as well as the four quarters of 2006 on average. But Katrina wasn't your ordinary hurricane. It struck a critical region for the national oil industry in terms of production, importing, and refining of petroleum products. Such strategic dependence on a specific region hit by a storm was absent in prior hurricanes in Florida, the East Coast, and Hawaii. Damage assessments are ongoing, and it will be some time before the overall impact becomes clear."