Katrina Could Tip
US Toward Recession
By Mike Meyers
Star Tribune National Economics Correspondent
Hurricane Katrina could prove more than a natural disaster for the Gulf Coast. It has the potential to be a tipping point that heads the economy toward recession, economists say.
How worried should Minnesotans be about a storm 1,300 miles away?
"I think the right word is 'very,' " said Tom Stinson, Minnesota state economist.
Hurricanes hit the United States every year, but Katrina was different.
When it surged into New Orleans, it smashed the nation's most active port facilities, an economic choke point for everything from oil and gas to lumber and coffee trying to get in and out of the country. The severity of the devastation means that it could be weeks or months before any of those facilities are operating near normal.
"The personal losses suffered by the people in the area are just going to be unimaginable for us living in the Upper Midwest," Stinson said. "But the effects on the economy are going to be real."
Alternate transportation routes will take time to establish and in many cases will be far more expensive than the river. And there is little to ameliorate the hit the country's domestic energy industry has taken from the storm, since fully 45 percent of domestic oil consumption is fed by drilling nearby in the Gulf of Mexico. Much of U.S. refining and natural gas production also is centered on New Orleans.
The storm's consequences, Stinson believes, could include a setback in consumer spending and a drop in economic growth. Minnesota farmers could see lower prices for their fall harvests, as grain traders incorporate higher shipping costs into their calculations of what to offer for commodities shipped to markets half a world away. Consumers could spend more on gas to get to the store and pay more for a variety of goods once they get there as retailers and other firms pass along their own increased costs.
It all could combine to confront Alan Greenspan and officials of the Federal Reserve with a stark choice this fall. Continue to raise interest rates to try to forestall the possibility of a return of serious inflation? Or halt or even reverse the past year's string of interest rate increases despite the inflation threat in recognition that the doubling of so many energy prices over the past year and a half threatens to derail the economy?
"People are lobbying for the Fed to cool it for a while," Stinson said.
The Fed under Greenspan has cut interest rates in response to past shocks to the economy, such as the 9/11 attacks and the Asian currency crisis of 1998.
But Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said he doubts that the Fed is ready to give up yet. He expects more interest-rate increases through the end of the year, then a pause in 2006 to assess the relative danger of inflation or an economic slowdown. But he conceded that Greenspan & Co. will be living dangerously.
"They'll be walking a razor's edge in their policy deliberations for the next 12 to 18 months," Anderson said.
Not all economists are convinced that Katrina will still be buffeting the economy months from now. Economist Kenneth Goldstein said the tapping of U.S. oil reserves kept by the federal government for cases of emergency should moderate oil prices.
"Six months out, certainly a year out, it will be hard to find Katrina in GDP, employment or industrial production figures," Goldstein said.
But the unprecedented nature of Katrina -- a jugular-vein hit to the U.S. transportation network -- makes its aftermath far more difficult to predict than other major storms. Hurricanes such as Andrew in Florida in 1992 and Hugo in South Carolina in 1989 brought downturns to regional growth for a few months, followed by an economic upswing as billions were spent on rebuilding.
"The ripple effects from that storm on the national economy are going to be several magnitudes greater than that of a normal hurricane," Stinson said.
Global Insight, an economic forecasting firm whose 5,000 clients include corporate planners and state and local governments, used apprehensive language in its initial take on the potential economic consequences, saying it's possible that 10 percent of the nation's already very tight oil refining capacity will be out of commission for weeks or months.
"Early estimates suggest that the worst-case scenario is unlikely to happen," Global Insight said in a bulletin to clients. "However, much in the same way that successive damage estimates kept being revised upward after Hurricane Ivan [in 2004], the impact of Katrina could well be considerably larger than the best-case scenario estimates [and what the markets seem to be expecting]."
Initial estimates were that Hurricane Ivan caused about $4 billion in damages, but the final tally was almost double that at $7 billion. Early estimates are that Katrina could top the $21 billion (inflation-adjusted) cost of Hurricane Andrew, making it the costliest storm in U.S. history.
If the damage to Louisiana oil refineries and pipelines proves substantial, motorists could face $3.50 to $4 prices for a gallon of gasoline, the already ravaged airline industry could be hit by unprecedented fuel costs and factories that make everything from steel to plastics could be far more expensive to keep running, said Nariman Behravesh, Global Insight chief economist.
"This is serious stuff in terms of putting a real damper on the economy," he said.
Even the Bush administration vow to tap U.S. petroleum reserves if oil prices remain at $70 more per barrel probably won't curb a run-up in fuel prices, Behravesh said. After all, more oil doesn't help if it can't be refined.
In the best case, the current spike in energy prices will be over by the end of the year. But if refineries and pipelines have sustained significant damage, oil prices might soar for months to come, sapping buying power and forcing a pullback in consumer spending on other goods and services. In that event, a recession could loom, he said.
"It's probably no more than a 20 percent possibility," Behravesh said. "But it's higher than it was a week ago."
Mike Meyers is at
Copyright 2005 Star Tribune.



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