Date of this Version
In September and October of this year, Hurricanes Katrina and Rita combined with an already-stretched world oil market to generate a spike in energy prices throughout the United States. The price spike naturally generated concern for the economy. Most recent recessions in the U.S. economy have been preceded by peaks in oil prices. Did the energy price spikes following Katrina and Rita derail the quickly-growing U.S. economy? The early evidence, and the economic outlook, suggest that the answer is no.
Despite the hurricanes, third quarter GDP growth continued to be very strong, exceeding 4%. Further, strong job growth returned to the national economy in November after slow growth in the proceeding months due to heavy job losses in the Gulf Coast region. Even the spike in gasoline prices abated in November. By December, gasoline prices were slightly lower than in the period before the hurricanes struck.
The hurricanes were a terrible human tragedy and devastated the economy of the affected regions. Like most natural disasters, however, the hurricanes were not a major drain on the national economy. The effects were modest and likely temporary, with a few months of slow job growth and a modest up tick in inflation at the end of 2005, and most likely, the beginning of 2006. In fact, the main threat for the economy may lie in the policy reaction to these events. Necessary spending to rebuild the Gulf Coast may exacerbate a yawning federal budget deficit, particularly if this spending reignites natural tendencies toward free spending among leaders in Washington.
The outlook calls for GDP growth of 3.7% in 2005 before growth slows to 3.3% in 2006 and falls to the 2.5% to 3.0% growth range in 2007 and 2008. Job growth is expected to continue to be modest, averaging about 1.5% annually for the 2005 through 2008 period. The national unemployment rate should remain around 5%. Inflation will continue to run around 3% in 2005 and 2006 before moderating to a 2% rate in 2007 and 2008.