Wednesday, September 07, 2005

Significant but not Overwhelming

So says the Congressional Budget Office in its preliminary report on the likely economic impact of Hurricane Katrina on economic growth. Quoting from the opening paragraph of the report:

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.

How do they get these numbers? Start with an overestimate of the affected areas:

The gross state product of Louisiana is about 1.2 percent of U.S. GDP, and that for Mississippi is about 0.7 percent. If half of that product were lost for three months (September to November), the level of real GDP would be lowered by about 1 percent from what it otherwise would be, cutting about 1.3 percentage points from the annualized growth rate for the third quarter and about 2.7 percentage points from the fourth quarter.

They then argue that production of the key industries in those areas will be unlikely to be affected for that long, putting the impact at about 1 percentage point (off an annualized growth rate) in each quarter. They then conduct an analogous exercise to estimate the loss in jobs:

Employment for September will decline significantly—estimates of the impact range from 150,000 to half a million—as a direct consequence of the hurricane. The Bureau of Labor Statistics (BLS) may or may not be able to estimate the size of this effect when it releases the September data on October 7. Employment will increase in subsequent months, as workers return home and businesses reopen and as reconstruction activity gathers steam. The large-scale relocation will generate additional demand for workers in receiving communities; some of those jobs will be filled by the evacuees themselves. Once New Orleans residents are able to return home, the net effect on the level of employment will be positive, as reconstruction activity continues.

A reasonable first pass at the questions they were asked. It is not CBO's fault that rebuilding after a natural disaster is one of the more obvious times when GDP--as a measure of economic well-being--comes up short.


Anonymous said...

You might not want to use language such as "comes up short" if you want Republicans to do okay in future elections given performance during Katrina.

I see no mention of public health impact, and potential for disease and epidemics. The current leaders of federal govt give me little confidence.

Anonymous said...

...On the other hand, the Grand Nagin and Blank stare Blanco have done a crack up job.

Henry Jasen said...

Unfortunately, the economic impact of Katrina is not limited to the Gulf Coast. The decline in refining capacity and damage to oil, petroleum, and gas pipelines impacts the entire nation. The price of grain in the midwest has already declined because it cannot be brought to market by usual means of transportation. Rotten grain slod for nothing rather than at normal prices will be a hit to GDP.

Anonymous said...

Have you ever written or blogged on the economics of orphaned disease and illness? (stuff that afflicts a small niche that is too small for big pharma's interests) What is the role of govt? What is the role of the private sector?

Anonymous said...