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September 7, 2005
The U.S. Economy: The Fundamentals Still Sound?
The latest edition of the Federal Reserve Banks' report on regional economic conditions (the Beige Book) suggests it is so:
Economic activity increased across the nation from mid-July through August, except in the Boston District, where activity was mixed. The growth was widespread as retail sales, services, finance, construction, manufacturing, mining, energy, and tourism all expanded. A few Districts reported softening in residential real estate markets, albeit from still brisk levels of activity, while commercial real estate markets strengthened in most Districts. Lending activity increased, and credit quality was stable. Conditions in the agricultural sector improved slightly, with late summer rains somewhat alleviating the effects of drought. Meanwhile, labor markets showed signs of tightening with modest wage increases. Except for energy, overall consumer price increases were modest.
This is all pre-Katrina, of course, but the first "official" take from the Congressional Budget Office suggests the disaster's effects will be, in Andrew Samwick's words, "significant, but not overwhelming":
Katrina could dampen real gross domestic product (GDP) growth in the second half of the year by ½ to 1 percentage point and reduce employment through the end of this year by about 400,000. Most economic forecasters had expected 3 percent to 4 percent growth during the second half, and employment growth of 150,000 to 200,000 per month. Economic growth and employment are likely to rebound during the first half of 2006 as rebuilding accelerates.
The effects on the populations and localities that took the direct hit are, of course, enormous, but according to the CBO the spillover effects to the macroeconomy are likely to be limited:
The supply of petroleum products, as indicated above, does not appear to be a major macroeconomic problem, but higher gasoline prices will temporarily reduce both gasoline consumption and consumption of other goods and services.
As to Brad Setser's fears, the CBO projects:
The damage to the Port of Southern Louisiana is significant, but most shipping will be able to resume in a few weeks or be diverted from the New Orleans facilities to other facilities on the Mississippi (such as Baton Rouge) or to Houston. Vessels drafting more than 39 feet cannot currently use the river. Only one grain elevator appeared to be severely damaged, and the others are coming back into operation as power is restored.
As Andrew points out, these are still only educated guesses at best. But, as the Beige Book report suggests, the reference point seemed to be an economy on relatively sound footing. Add to that the fact that the global economy seems to be strengthening more generally, as noted by The Skeptical Speculator, and there is at least some reason for optimism.
I have been feeling a bit gloomy about things in the past week. Maybe some perspective is in order.
September 6, 2005
Hurricanes and Employment: A Retrospective
The September 1 Wall Street Journal contained an article by David Wessel (page A1in the print edition) that documented average GDP growth over the half-year following quarters in which a major hurricane hit. This picture sums up the main lesson:
Perhaps unsurprisingly, there is likewise scant evidence of much lasting impact -- if any -- on employment growth following major storms past. The following set of pictures depict monthly job growth for the top ten most costly U.S. hurricanes (in terms of material damage) since 1954. The vertical lines identify the month of the event, and the costs are expressed in 2004 dollars.
It may turn out, of course, that the scale of Katrina is so far off the map that these historical precedents are not much precedent at all. Although I'm not entirely sure how anyone can possibly know at this point, at least one analysis has an early estimate in the neighborhood of $100 billion, which would make it twice as much as Andrew, the current record holder (which it itself was well over twice as expensive as any other single storm in the period under examination). On the other hand, there is the hypothesis -- promoted in today's Wall Street Journal (page A1) by Jon Hilsenrath and Greg Ip -- that the U.S. economy is better suited to withstand major shocks than in the past.
I guess, unfortunately, we will know soon enough. The best we have now is plenty of informed speculation, from the likes of Brad Setser, Econbrowser, Angry Bear, The Big Picture, The Capital Spectator, The Eclectic Econoclast, Environmental Economics, Peter Gordon's Blog, the NABE blog, and many more.
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