Hurricane threatens economy

WASHINGTON — Surging energy prices and business disruptions from Hurricane Katrina, likely the costliest natural disaster in U.S. history, threaten to slow what has been a steadily expanding economy.

The powerful and deadly storm devastated much of the Gulf Coast area in the South, knocking out oil refineries, shuttering businesses and crippling the flow of commerce through ravaged ports.

While the damage has yet to be fully assessed, economists and other experts believe the disaster will rack up insured losses of up to $25 billion. That would surpass the $21 billion (in inflation-adjusted losses) stemming from Hurricane Andrew in 1992, analysts said.

"This will be one of the — if not the — biggest single event in terms of insured losses in U.S. history," said Julie Rochman, spokeswoman at the American Insurance Association.

From an economic point of view, the biggest worry is that fallout from the storm will propel already lofty energy prices even higher. That's because the Gulf Coast region is an essential hub for oil and gas production and distribution.

Rising energy prices are likely to crimp consumer spending and business investment, slowing economic growth in the second half of this year, economists predicted. A worst-case and remote scenario is that the economy would be thrust into a recession, analysts said.

That scenario is considered unlikely, though, because the economy is more flexible and energy efficient and thus better able to withstand oil-price shocks now than those suffered 25 or 30 years ago, analysts said.

"This is basically a supply shock that is very similar to the oil shocks of the mid-1970s and early 1980s, and so it is going to knock down economic growth. There is no question this is bad news for the economy," said Nariman Behravesh, chief economist at Global Insight. "We will take a hit to growth, but we won't fall into a recession."

Economic growth clocked in at a solid 3.3 percent annual rate in the April-to-June quarter as both shoppers and businesses did their part to keep the economy moving ahead, the Commerce Department reported Wednesday. That followed an even larger 3.8 percent growth rate in the opening quarter of this year.

In the wake of Katrina and the threat of even higher energy prices, however, some economists scrambled to lower their economic growth projections for the rest of this year.

Before the storm, economists were predicting the economy would grow by around 4.5 percent in the current July-to-September quarter. Now Behravesh and others are forecasting a pace of around 3.5 percent, which would still be healthy.