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Weathering Katrina's punch
Costliest storm sent energy prices soaring, dented the job market, but economy won't be derailed.
October 7, 2005: 10:55 AM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Even as the costs of the nation's most expensive storm are added up, it's becoming more and more apparent that the economy has weathered Hurricane Katrina relatively well.

The government reported Friday that payrolls fell by 35,000 last month as people were displaced and businesses shuttered by the storm. While that was the first decline in payrolls in more than two years, it was a far lower number than the 150,000 or so economists had forecast.

Insured losses from Katrina are estimated at around $35 billion, a number expected to rise as more claims roll in. And forecasting firms put the total economic costs, including losses that weren't insured, at $100 billion or more.

While gasoline is falling at the pump, higher natural gas and heating oil prices this winter could hurt consumer spending in coming months.

And hundreds of thousands of families and small businesses along the Gulf Coast are facing a financial crisis despite promises of assistance, which could plunge thousands of middle-class families into bankruptcy.

Yet despite these shocks to the system, economists say the nation's economy should keep growing solidly.

The Federal Reserve appears on course to continue its path of regular quarter-percentage point interest rate hikes, as Fed officials have made clear in comments this week that they see a greater threat from inflation than from a possible economic slowdown.

The main reason the economy has mostly shaken off Katrina: its underlying strength ahead of the storm.

"There are times when the economy is resilient," said Anirvan Banerji, director of research for the Economic Cycle Research Institute. "In all of the shocks where recession resulted, it's like things were lined up like dominos -- you knock one down and they all come down. This is not one of those times."

Anthony Chan, senior economist at JPMorgan Asset Management, said that the Sept. 11 terrorist attacks, while less expensive in economic terms, was a greater shock to the economy because it came during a recession.

"You shock the economy when it's already in recession, you don't get a bounce-back," he said. If it had been Hurricane Katrina, rather than the terrorist attacks, that hit on Sept. 11, 2001, the impact on the economy would have been far more severe, he added.

A lift from recovery efforts?

And while growth will probably take a small hit in the third and fourth quarters due to Katrina, the economy will probably get a lift in subsequent quarters as businesses gear up for rebuilding efforts along the Gulf Coast, the experts said.

They noted that the federal money and insurance payments flowing into the region are like an economic stimulus package.

One sign of that was the Institute of Supply Management's reports on business activity this week, based on surveys of executives in manufacturing and services.

While the group's service sector index showed a slowdown in growth, it still showed growth. And manufacturers reported a leap in new orders and production as factories geared up for the post-Katrina recovery effort that lifted the sector to its fastest growth in more than a year.

Part of the economy's resilience is from the country's sheer size. Even with more than 1 million households affected by the storm, that's just over 1 percent of households nationwide.

Even some of the lost business activity unique to the affected area, such as tourism, will probably shift to other parts of the country as conferences and trade shows find other homes or tourists travel elsewhere.

"For the people who experience it, it's a tragedy, but for the country as a whole, we can absorb it," said Greg Valliere of the Stanford Washington Research Group.

Valliere said the $62 billion in approved federal assistance will probably boost the budget deficit but even that's coming at a relatively good time.

Federal government receipts have been running ahead of earlier forecasts in recent months for a number of reasons, including improved corporate profits and employment.

As a result, Valliere expects the budget deficit will probably come in around $300 billion for the fiscal year that ended Sept. 30, about $100 billion less than forecasts from last spring. That lessens the already slim chance that a Republican Congress would eye higher taxes to pay for federal storm assistance.  Top of page

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