The impact of Hurricane Katrina will not be fully known for several weeks, but it is shaping up to be the costliest natural disaster to ever hit the United States. Late this afternoon, it became known that the gas pipeline providing nearly all of the southeast's gas supplies from the New Orleans area had gone offline due to the storm. This is causing gas prices to spike to above $3/gallon throughout parts of the nation. The impact at the pump is insignificant considering the catastrophic damage in New Orleans and surrounding areas. The federal government and insurance companies will provide significant funds for rebuilding, but many of the poorer areas will take several years to get back on their feet.
The economic impact of most hurricanes is often minimal. The lost economic output immediately following a storm is typically following by robust activity as impacted areas quickly move toward rebuilding their communities. The catastrophic flooding throughout most of New Orleans will significantly delay rebuilding efforts. Economic impact will be most severe in the impacted areas, but the national economy will likely face some headwinds. First, the housing market is showing signs of slowing down. Home construction remains robust, but the frenzied activity we have seen during the past couple years is beginning to return to more normal levels. There have been further signs this week high gas prices are beginning to impact the consumer as orders for durable goods showed nearly a 2% decline and the Chicago PMI registered its first negative reading since our nation emerged from the dot-com recession.
Slowing economic growth confirms Financial-Watch's belief that the U.S. economic recovery cannot sustain itself with short-term interest rates higher than 4%. We believe the Federal Reserve would be prudent to temporarily pause its tightening cycle to assess the economic fallout from Hurricane Katrina. Financial-Watch believes current predictions of the damage to the New Orleans and surrounding areas underestimates the true amount of devastation caused by the storm. It is too early to accurately predict Hurricane Katrina's impact on the national economy, but Financial-Watch believes economic growth in the third quarter will struggle to surpass 3%.
About the Author
Mike Fitzpatrick writes for Financial Watch and contributes to Mutual Funds