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Katrina effect on economy seen lingering

Even as analysts breathe a sigh of relief over reports that Hurricane Rita largely spared the nation’s biggest concentration of oil refineries, economists remain concerned that the far more destructive Katrina has dealt a heavy blow to consumers.
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CHICAGO - Even as analysts breathe a sigh of relief over reports that Hurricane Rita largely spared the nation’s biggest concentration of oil refineries, economists remain concerned that the far more destructive Katrina has dealt a damaging blow to consumers.

Leading business economists gathered for a conference in Chicago Sunday focused on the impact that Katrina — and to some extent Rita — will have on energy prices and the likely ripple effects on commodity prices, industrial output and confidence.

Both hurricanes resulted in a temporary loss of oil, natural gas and gasoline output, with full production unlikely to resume for weeks or months.

But analysts said initial reports about Rita’s impact on the energy sector are promising, and some said they expected prices to drop immediately when international energy markets reopen after the weekend.

“It does seem to be the case that certainly in comparison with Katrina, Rita will be a much more modest event,” Douglas Holtz-Eakin, director of the Congressional Budget Office, told the annual meeting of the National Association for Business Economics.

Holtz-Eakin, speaking to the conference by telephone from Washington, also said that Katrina might have a bit less impact on the national economy that the non-partisan CBO initially estimated after the storm.

Holtz-Eakin said Katrina might cause about 300,000 workers to lose their jobs, rather than the 400,000 initially estimated. And he said economic growth likely would fall 0.75 percent in the current quarter and 0.5 percent in the fourth quarter as a result of the deadly storm, a bit more optimistic that the previous estimate of 0.5 to 1 percent for the second half of 2005.

Much of the lost production likely will be offset beginning late this year and early next year by increased government spending and private investment to rebuild devastated New Orleans and other areas hit hard by the hurricane, Holtz-Eakin said.

Holtz-Eakin said that despite heavy damage to areas near the Texas-Louisiana border from Rita, there is no immediate need for Congress to allocate additional funds for rescue and relief. That is because the Federal Emergency Management Agency is flush with $45 billion in unobligated funds allocated in the wake of Katrina.

By next year, the economy should be growing again at its long-term average rate of about 3.5 percent. But Holtz-Eakin and other economists said there are still many uncertainties left over from the two storms, including how consumers will react to the new reality of higher gasoline and home heating prices.

Rita arrived against the backdrop of an alarming decline in consumer confidence. Consumer sentiment took its biggest one-month dive in 25 years this month after Katrina hit, based on preliminary results of a monthly survey from the University of Michigan.

While sentiment should be revived a bit by the fact that the latest storm swept ashore with a minimal loss of life, analysts note that energy prices at the retail level were rising even before Katrina hit and are unlikely to decline in the short term. That leaves some economists concerned about a potential fresh price shock to consumers when they see their first heating bills of the winter season in the next few weeks.

Carl Tannenbaum, chief economist of LaSalle Bank, said he was not very worried about gasoline prices, which he expects to fall back quickly to the levels prevailing in August before Katrina hit.

“What I do worry about is the home heating season,” he said. “We’re going to getting very large bills for heating our homes at exactly the same time merchants are hoping we will be doing a lot buying. The timing could not be worse.”

Experts at the conference stressed that while gasoline prices may be more visible, soaring natural gas prices could prove to be the more stubborn problem because it will be several years before the United States is due to get a significant increase in supply. That is how long it will take until new facilities are built to import liquefied natural gas that is needed because rising demand is outstripping the available North American supply.

The most extreme result could be felt by industrial users like steel, chemical and paper plants that could face supply interruptions this winter under regulations that favor an uninterrupted supply for residential and commercial users, said Loren Scott, a consultant based in Baton Rouge, La.

“What you’re going to see is the further marginalization of energy-intensive industries,” said Mike Zenker, a natural gas expert with Cambridge Energy Research Associates.

Zenker also noted that when they do come on line beginning in 2008, most of the facilities being built to accept tankers with liquefied natural gas will be located on the Gulf Coast, “right in the heart of Katrina and Rita country.”