Empire of Honour
The Magnitude of Katrina

Economic Impact of Katrina

Andrew Samwick reads the CBO's rapid analysis of the economic impact of Katrina:

Vox Baby: 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.

I'm now guessing that we are down $100 to $200 billion in total national wealth (i.e., two to four times the predicted total loss-of-GDP shortfall).

What scares me is that hurricane season is only half over.