Katrina's Economic Fallout Could Slow Economy

Much Depends on Gasoline Prices, Consumer Response

For Immediate Release: September 6, 2005

Contact: Lynn Erskine, 202-293-5380 x115

WASHINGTON -- 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 Policy Research.

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 skyrocketing. 

"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.