NEW ORLEANS – The following is text of a Sept. 6 letter from Congressional Budget Office Director Douglas Holtz-Eakin to Senate Majority Leader Bill Frist (search), R-Tenn.:
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The Congressional Budget Office has received numerous inquiries regarding the likely consequences of Hurricane Katrina for the national economy, federal receipts, and federal outlays. While the primary consideration is the human cost of the disaster, it will also likely spawn economic impacts, some of which will spread throughout the economy.
Those impacts will arise from the disruption of production (especially of oil and oil products) and spending in the affected areas, from the loss of wealth of those most directly affected, and from the loss of life. In addition, the disaster is also likely to have budgetary impacts beyond the recently enacted supplemental. Some of those will flow directly from federal involvement in the cleanup from disaster; others will come from the disruption to production and private spending.
While it is not possible at this time to provide a clear picture of the impacts, CBO staff have put together some initial thoughts about those economic and budgetary effects in the attachment to this letter. To provide context, recall that the overall economy was growing steadily at the time of the disaster. (CBO's summer forecast called for 3.7 percent real growth in 2005 and 3.4 percent in 2006).
The devastation in the Gulf Coast region is unlikely to knock the economy far from that course. While making specific estimates is fraught with uncertainty, evidence to date suggests that overall economic effects will be significant but not overwhelming. Because they are concentrated in this year, there is the potential to reduce growth by between one-half and one percentage point at an annual rate in the second half of 2005. (On a year-to-year basis, the impact may be as small as a few tenths of a percent of GDP). Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely.
While Katrina has devastated ordinary business, it will also likely lead to a boom in clearing and reconstruction activity, first in the areas along the coast that escaped persistent flooding, and then in New Orleans. This follows a pattern familiar from past natural disasters (such as Hurricane Andrew in 2002), but with the caveat that such reconstruction may begin a bit less rapidly.
At this point the ultimate impact of Hurricane Katrina on the federal budget is unclear, but it will be dominated by legislative actions of the Congress. The President has already requested and Congress has appropriated $10.5 billion in emergency assistance. In addition to that legislation, substantially more funding is likely to be provided for assistance to businesses and for long-term reconstruction efforts. There may be other changes in spending both increases and decreases associated with the disaster, in part because the disruption of payments systems in the Gulf Coast region may affect the timing of several kinds of federal payments and of tax receipts.
I hope that you find the attachment useful. CBO would be pleased to address any further questions that you may have.
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