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October 5, 2005
Reuters helps me make a point
This article is mostly about the recent comments on inflation by Fed officials. As such it is worth mentioning on that basis alone. There is, however, not much new to talk about that we haven't discussed already as far as inflation is concerned.
There is a quote at the end that hearkens back to a discussion from a while back on the topic of disasters and GDP.
While [Kansas City Fed president Thomas] Hoenig expressed caution about risks to the economy, especially from potential inflation, he was generally upbeat about prospects for growth.
"While the U.S. economy is going to face some pretty significant challenges, and does face some pretty significant challenges, my overall assessment is that the national economy ... will in fact be able to withstand it and I think have solid growth as we move through this transition into next year, 2006, and beyond," Hoenig said.
He said the hurricanes might subtract 0.5 to 1 percentage point off U.S. economic growth in the second half of this year, according to private and Fed forecasts, though he personally thought it would be closer to 0.5 percentage point.
But the negative impact will be transitory while rebuilding the Gulf Coast regions that were hardest hit will recapture much of the growth next year.
The last paragraph is Reuters wording, not Hoenig's precisely. But it makes the point that I made at the time. If growth falls and then you "recapture much of the growth", is that really a good thing? And if the resource pressures cause the Fed to tighten more than they had anticipated, doesn't that compound matters? Interest rates rise further, perhaps much further if we add another $200 million to the deficit. Is there any reasonable scenario in which real GDP in 2007 ends up higher than it would have been without the hurricanes?
Then why is it that the immediate post-hurricane sound bites are about what a boon this will be to the economy instead of saying that the rebuilding will recapture much of the growth that is lost in the aftermath of the hurricane?
Posted by William Polley at October 5, 2005 11:11 PM
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