Katrina expected to slow down steady economic expansion

WASHINGTON -- Surging energy prices and business disruptions from Hurricane Katrina, likely the costliest natural disaster in U.S. history, threaten to slow what has been a steadily expanding economy.

The powerful and deadly storm devastated much of the Gulf Coast area, knocking out oil refineries, shuttering businesses and crippling the flow of commerce through ravaged ports.

While the damage has yet to be fully assessed, economists and other experts believe the disaster will rack up insured losses of up to $25 billion. That would surpass the $21 billion (in inflation-adjusted losses) stemming from Hurricane Andrew in 1992.

"This will be one of the -- if not the -- biggest single event in terms of insured losses in U.S. history," said Julie Rochman, spokeswoman at the American Insurance Association.

From an economic point of view, the biggest worry is that fallout from the storm will propel already lofty energy prices even higher.

Rising energy prices are likely to crimp consumer spending and business investment, slowing economic growth in the second half of this year, economists predicted. A worst-case and remote scenario is that the economy would be thrust into a recession, analysts said.

That scenario is considered unlikely, though, because the economy is more flexible and energy efficient and thus better able to withstand oil-price shocks now than those suffered 25 or 30 years ago, analysts said.

"This is basically a supply shock that is very similar to the oil shocks of the mid-1970s and early 1980s and so it is going to knock down economic growth. There is no question this is bad news for the economy," said Nariman Behravesh, chief economist at Global Insight. "We will take a hit to growth, but we won't fall into a recession."

Economic growth clocked in at a solid 3.3 percent annual rate in the April-to-June quarter as both shoppers and businesses did their part to keep the economy moving ahead, the Commerce Department reported Wednesday. That followed an even larger 3.8 percent growth rate in the opening quarter of this year.

In the wake of Katrina and the threat of even higher energy prices, however, some economists scrambled to lower their economic growth projections for the rest of this year.

Before the storm, economists were predicting the economy would grow by around 4.5 percent in the current July-to-September quarter. Now Behravesh and others are forecasting a pace of around 3.5 percent, which would still be healthy.

But for the final quarter of this year, he and others believe growth could be as low as a way-below-par 2 percent pace, versus a previously estimated growth rate in the 3 percent range.

The situation revived the notion that the Federal Reserve might take a pause in its rate-raising campaign later this year if the economy shows signs of weakness, analysts said. Were the economy to flash serious trouble signs, the Fed might actually cut rates-- another remote scenario, analysts said.

For now, though, they still expect Fed policy-makers to boost rates at their next meeting, Sept. 20.

The nation's unemployment rate, now at 5 percent, probably will rise and job growth could slow in the months ahead as the toll of the storm ripples through the economy, analysts said. "On the national level, I think you'll see weakness in jobs figures for September, October and maybe even November," said Mark Zandi, chief economist at Economy.com.

The government's next employment snapshot -- for August -- is to be released Friday. The hurricane isn't expected to affect those figures, which were collected before the storm hit. Economists are forecasting payrolls to expand by 190,000 jobs in August and the jobless rate to hold steady at 5 percent.

Ben Bernanke, the president's chief economist, believes Katrina's impact on the overall economy would be "fairly modest," he told CNBC.

Commerce Secretary Carlos Gutierrez was optimistic the economy would weather through. "Our economy has shown resilience in the past. ... I am confident the fundamental strength of the American economy ... will allow us to meet this challenge as well."

With the aim of helping the energy squeeze, the Bush administration announced Wednesday that it will release oil from federal petroleum reserves to help refiners affected by hurricane.

In response, oil prices that had shot up to a record closing high of $69.81 a barrel on Tuesday after having briefly surged past $70 a barrel, moderated a bit on Wednesday. Prices closed at $68.94 a barrel.

President Bush, whose job approval ratings have been sinking in recent polls, wants to see the economy on solid footing and the energy situation stabilize.

Key ports in the Gulf Coast region remain closed, hampering the flow of goods in and out of the area, experts said. More than half of U.S. grain exports -- mostly corn and soybean -- are shipped down the Mississippi River.

"It is certainly going to disrupt commerce and cause problems for companies involved in exporting products such as grain, poultry and forest products and cause problems for importers of goods such as oil, bananas and other cargo," said Joseph Bonney, editor of The Journal of Commerce, a weekly that covers international trade.