The Budget Office says the economic toll from the hurricane will be significant but not overwhelming. In a preliminary estimate, budget director Douglas Holtz-Eakin said the destruction could reduce overall employment by 400,000 over the next few months. Employment is then likely to rise by even a higher figure once reconstruction funds reach the impacted areas.
Senate Majority Leader Bill Frist says the cost of relief operations could reach from $100 billion to $200 billion, a figure up to six times the amount the federal government spent after the September 11 terrorist attacks four years ago.
Gerald Lucas, an economic strategist at the Bank of America in New York, says he is worried that higher gasoline prices will slow the pace of economic growth. Gasoline prices are up by more than 30 percent in the past week and are 76 percent higher than a year ago.
"I personally think that the gasoline price spike has more contractionary effects than the risk of inflationary (effects)," Mr. Lucas says.
Prior to the hurricane most analysts had been predicting 3.5 percent to 4 percent economic growth this year with only a modest slowing next year. Treasury Secretary John Snow believes the hurricane will shave the growth rate by more than five-tenths of one-percent.
The U.S. central bank, the Federal Reserve, meets September 20 to consider adjustments in short-term interest rates. Those rates have been rising from near record lows 14 months ago. At regular intervals the Fed has raised rates ten consecutive times. Chicago Federal Reserve Governor Michael Moskow suggests rates are likely to go still higher in order to combat the risk of higher inflation.
"I'm concerned about core inflation running at the upper end of the range I feel it is consistent with price stability. If indeed we begin to see a string of higher inflation numbers people may soon begin to expect permanently higher inflation. Such expectations could become self-fulfilling," Mr. Moskow says.
The danger is that higher rates combined with a drop in disposable income could tip the now healthy U.S. economy into recession.
