Fed report: Katrina will increase unemployment, slow economic growth

An estimated 400,000 Americans will lose their jobs and the nation’s economy will grow more slowly during the second half of this year as a result of the economic fallout from Hurricane Katrina, according to a federal report released Wednesday, The Los Angeles Times reports.

But the long-term economic impact of the deadly storm that devastated New Orleans and the Gulf Coast of Mississippi and Alabama will be relatively muted, and rebuilding activity should give the economy a boost, the Congressional Budget Office reportedly said.

“While Katrina has devastated ordinary business, it will also likely lead to a boom in clearing and reconstruction activity,” the report said. Overall economic effects “will be significant but not overwhelming.”

The study, which echoed reports issued by private economists, said the storm will have a broad economic fallout that will hit the federal government, private companies, and individual consumers, the newspaper reports.

For the overall economy, Katrina could knock ½ to 1 percentage point off the gross domestic product’s growth rate during the second half of the year, the report said. GDP, which measures the nation’s economic activity, had been forecast to expand between 3% to 4% during the second half.

The combined economic output of Louisiana and Mississippi, which suffered most of the storm damage, is relatively small, accounting for less than 2% of the nation’s GDP. However, because of the damage to the region’s large energy industry, Katrina will take a greater toll on the nation’s economy than did such destructive hurricanes as Andrew and Hugo, the CBO reportedly said.

“Economic activity in the rest of the United States will be adversely affected through higher energy prices, which will temporarily reduce other consumption (and savings), and through reduction in port activity, which may keep energy supplies and raw materials from getting to producers and consumer goods from getting to retailers,” the CBO said.

In addition to spending billions of dollars on emergency relief and reconstruction, the federal government faces possible reductions in royalty payments from oil and gas drilling and a drop in income and gas taxes.

Despite the dire projections, the report said the U.S. economy is strong and large enough to absorb Katrina’s impact without much pain in the long run, the newspaper reports. The rebuilding of destroyed and damaged homes, businesses and commercial and government facilities will pump billions into the economy and create jobs, according to the study.

“Economic growth and employment are likely to rebound during the first half of 2006 as rebuilding accelerates,” the CBO said.