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ECONOMIC ANALYSIS: Economy likely to purr on despite hurricane mayhem

October 10, 2005

Did your company miss its earnings targets last period? Or did your household spend a little too much on your last vacation? Or maybe you've just added a few extra pounds on your waistline recently. Then you should do what just about everyone else is doing-blame it on Katrina.

It seems as if every disappointing result in the economy is being blamed on the big storms that have rolled in from the Gulf of Mexico in the last six weeks. That's easy to understand. Katrina and Rita were enormous events any way you look at them, and their impact on a broad spectrum of industries and markets has yet to be fully understood by most of us.

But those storms have served as a nice cover story, too. After all, we had high energy prices, a weak airline industry, big budget deficits and a fractious political environment well before those nowfamous low-pressure cells ever started to congeal over the Atlantic.

In the months to come, we are bound to hear more unpleasant outcomes laid at the doorstep of those monster storms. And for economic scorekeepers like me, this poses a simple question-just how do events like these two hurricanes show up in statistics on economic performance?

To begin with, you can throw out just about everything you may have read in the immediate aftermath of the storm. The instinct of journalists everywhere is to be the first to "break" a story. That, combined with the demands of the information age for quantification, has in the case of Katrina produced a distorted picture of the storm's economic impact. Insistence on summary information when none is available has produced an excess of speculative quantification that has served little purpose for anyone but headline writers.

Apart from our compassion for those who have suffered so much from the storms themselves, what most of us want to understand is exactly how much damage these events will do to the overall economy. Part of this, it turns out, is accounting, and part of it is economics.

We got our first taste of Katrina's and Rita's impact in the recent report on August personal income. According to the Bureau of Economic Analysis, personal income, which fell 0.1 percent in that month, would have registered a 0.2-percent increase were it not for the impact of Katrina at month's end. The loss of uninsured property shows up in both personal and business accounts as an increased depreciation of capital, and an immediate decrease in rental income.

These losses will be offset partially in the coming months by payouts from insurers and transfer payments from governments, which show up as additions to income. That helps explain why, on a quarterly basis, other disasters in our recent past have had a fairly negligible impact on bottom-line measures like gross domestic product, either coincident or in the immediate aftermath of the catastrophic event.

But the devastation wreaked by Rita and particularly Katrina is an order of magnitude greater than anything we've seen in recent memory. And the damaging blow to the energy industry makes the impact of these events much more than an accounting exercise.

The disruptions in supply and the prospect of painful price spikes as the damage to the energy infrastructure is repaired and facilities are brought back online have made these storms uniquely challenging for the rest of the economy.

Coming at a time when the economy is remarkably healthy, most of us in the forecasting business think overall growth in the economy won't be threatened by these events. But there's no question their impact will be longer-lived than we'd like.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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