South-Westerns' Economic News Summaries
Hurricanes and Jobs
Topic Employment, Unemployment and Inflation
Key Words

Recession, Unemployment Rate and Jobs

News Story

Just before the devastating impact of hurricanes Katrina and Rita, the U.S. economy added 169,000 new jobs and reached a four-year low unemployment rate of only 4.9 percent. Now, in the aftermath of Katrina and Rita, many economists are downgrading their estimates of economic growth as it remains unclear how the economy will react to these national disasters. Some economic analysts are saying that the chances for a recession are increased by the hurricanes’ impact.

“We know that going into the [first] hurricane the economy was fine, things were status quo,” said Joshua Shapiro, chief United States economist at MFR Inc., a New York-based research firm. “The problem with the hurricane is in addition to being a regional disaster and a tragedy, it has affected the energy industry and international trade.“ Rita, affecting the Galveston and Houston, TX areas, also affected prime refinery capability.

As gasoline prices rise above the $3 level and a growing number of U.S. residents and workers are displaced along the Gulf Coast, the economy may just not be able to maintain its previous upward trend and employment my fall by record numbers. In a note to his clients, Ian Shepherdson of High Frequency Economics wrote, “Next month, payrolls will plunge,”

The economic impact will be greatest along the gulf states, but wide-ranging ramifications are expected for the rest of the economy because of the potential damage caused to refineries, pipelines and offshore production capabilities. Even before Katrina struck, higher energy prices appeared to be pushing up inflation and causing worries of slower growth. Now, with Katrina’s and Rita’s damage added to a picture of slower general economic activity, we could well be in for a dip in the business cycle.

“There have been a number of indications, anecdotally, that consumer spending had tailed off prior to Katrina’s arrival,” said Richard Yamarone, director of economic research at Argus Research in New York. “ And now this is almost like a one-two punch.”

The good news in this human tragedy is that historically, natural disasters have been known to actually boost economic activity through increased construction and rebuilding activity that shows up as new demand for the economy. Moreover, it could spread inward from the Gulf States to other states where expertise and equipment are available to respond to the new demand. “In the long run, maybe we might even get a boost,” said Yarmarone. “We have had some really old ports and infrastructure” that will now have to be built or replaced. The rebuilding will take time since it may be months before residents can even return to the city, let alone begin to rebuild their homes and their lives.

Questions
1.

Discuss how higher gasoline prices may have a dampening effect on economic growth.

2. Discuss how, if any, your own behavior has changed in response to higher gasoline prices.
3. Use the notion of the business cycle to discuss economic activity in a recession.
Source Vikas Bajaj, “Economy Adds 169,000 Jobs, But Storm’s Impact Not Yet Felt”, The New York Times Online, September 2, 2005
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