Katrina will stimulate GDP growth, not hinder it

In recent days numerous forecasts have been issued about the negative effect Katrina is going to have on US GDP growth rate over the next couple of quarters. The first of those I saw was by Goldman Sachs and said growth rate will be reduced by 0.5 % and many more have followed. There is unanimous agreement on that point directionally.

They are all wrong. The effect of Katrina will be to stimulate growth and not hinder it. I have no idea by how much but certainly to some degree.

In normal times, the area affected by the hurricane accounts for approximately 1% of total US retail sales. Because the area is not in any obvious way likely to account for higher percentage of the total output one can safely assume that not a significantly larger proportion of productive capacity of the US economy is located there.

While the normal 1% of output in that area will certainly be smaller than that over the next year, the amount of consumption that the area accounts for will increase significantly. The enormous destruction that took place means a lot of things need to be replaced immediately from cars to housing to even food and clothing inventory in stores and in homes. All of this consumption will result in increased output elsewhere. As long as the US economy is not at 100% utilization rate, the lost productive potential of the area will be compensated for by the rest of the country and demand for goods several times the normal rate will be easily met.

The overall effect of hurricane Katrina on the US economy will be stimulative.


Anonymous said…
I have family in Louisiana...I will e-mail you.G

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