Economic Fallout Could Slow Economy
Much Depends on Gasoline Prices, Consumer
Immediate Release: September
Erskine, 202-293-5380 x115
-- The economic fallout from Hurricane Katrina could have a serious
impact on the current economic recovery, according to economists at the
Center for Economic and Policy Research.
"Depending on what happens to gasoline prices in the next few months,
it could even trigger the end of the current expansion," said Dean
Baker, macroeconomist and Co-Director of the Center for Economic and
Even before the hurricane damage, the economic recovery was more
fragile than many people thought, according to CEPR economists, for
several reasons. Wages have barely kept pace with inflation since the
end of the last recession, leading to a large increase in debt-financed
consumption. This week the personal savings rate hit a record low of
negative 0.6 percent, raising doubts about how long consumers could
keep up current spending levels.
A sustained increase in gasoline or, as winter approaches, other energy
prices could tip many households over the edge, forcing them to cut
back on other spending. Damage to the Gulf area has "shut in" about 1.5
million barrels of daily oil production, 16 percent of domestic natural
gas production, and 10 percent of domestic refining capacity. Much
depends on how long it takes for this production to recover.
CEPR economists also warned that these prices could depend on the
production decisions of large energy companies. In 2001, Enron and
other big energy suppliers were able to control energy supplies in
California and other states, sending electricity and natural gas prices
"The Federal Energy Regulatory Commission will have to pay closer
attention this time to make sure there is no repeat of what happened in
2001," said Baker.
The economic recovery is also fragile because the long housing boom has
that has driven the recovery and has been responsible for most of the
job creation since the end of the last recession may be nearing an end.
Many people have bought houses with the expectation that home prices
will continue to rise at the rates of recent years. As these prices
slow their rate of increase, or even begin to fall in some areas, it
will also have a negative impact on consumer spending.
CEPR economists also expressed concern for the estimated one million
people displaced by the storm. Many will need housing, resettlement,
training for employment, and income support for an indefinite period.
At a time of budget tightening, Congress may be reluctant to
appropriate the necessary funds.
The Center for Economic
and Policy Research is an independent, nonpartisan think tank that was
established to promote democratic debate on the most important economic and
social issues that affect people's lives.