Soaring energy prices and the fallout from hurricanes Katrina and Rita will have a significant impact on the U.S. economy, putting upcoming holiday retail sales at risk, a new report from the U.S. Conference Board suggests.

However, the economic havoc generated by the two deadly hurricanes is unlikely to trigger a recession, the research organization says.

The report warns that the fallout from the hurricanes will have a major impact on the economy and the business cycle. It has already produced energy-price shocks that will cut into consumer spending, it notes. Consumer confidence has fallen, a further danger sign for consumer spending. The magnitude of damage to lives and property is still being measured. Also, the labour market continues to cool off.

“From an energy standpoint, the storms could not have come at a worse time for U.S. consumers and businesses,” says Goldstein. “While Katrina wasn’t necessarily a bigger storm than Hurricane Andrew that crippled southern Florida in 1992, it disrupted energy supplies at a time when the balance between supply and demand was already precarious. Hurricane Rita’s impact was less than Katrina’s because it largely spared the chemical and proto-chemical facilities in the region.”

The loss of natural gas production will be felt more than the loss of crude oil, since it cannot quickly be replaced either with imported oil and gas or drawn from the Strategic Petroleum Reserve, it predicts.

But economic growth was already losing steam before the hurricanes hit, the Conference Board says. It suggests that the impact of Katrina-Rita will intensify the economic slowing that was already underway, with the main impact felt in the third and fourth quarters of this year. The key number to watch will be consumer spending.

It predicts that in 2006, the economy will recover and resume a growth path closer to its long-term average rate of about 3.5%. The overall growth rate for the year will be 2.5%. The outlook assumes the Federal Reserve Board will not raise the federal funds rate higher than 4%. Should the Fed continue to hike rates and the yield curve invert, the outlook will be significantly worse.

“History tells us that the overriding factor foreshadowing the economic impact of a disaster is the direction the economy is already following,” says Goldstein.

On the positive side, energy prices can be expected to fall back in the near future and government and private sector spending on reconstruction is already adding jobs in the areas directly affected by the hurricanes, it adds. “Oil prices will likely stay in the range of US$60-US$65 per barrel for the rest of 2005, and then ease to about US$55 during the first half of 2006,” it predicts.

Conference Board Web site
http://www.conference-board.org/