Thank you Sharpie for the intro, and welcome back home - if only for a little while.
The macro impact of Katrina is hard to measure Since Katrina, and the resulting flood, are likely to exacerbate pre-existing trends, rather than reverse old or offer new trends.
Q2 growth was recently revised downward to 3.3%. July data on construction and cap goods was weaker than expected. Retailing lagged in late summer (mainly because of a 20%+ increase in gas costs). This was all pre-Katrina.
Katrina only strengthens the previous data. Gas costs are projected to stay at their current levels for around four to six weeks. However, the prior gasoline projection tends to the downside as work designed to reduce the commercial impact has already commenced at the state level. Federal response has been muted, but as criticism continues to grow, it is likely that some concessions (beyond environmental easing) will be offered.
Moving into the winter with a full blown energy shock will further eat into discretionary spending. Real US consumption growth will likely fall below 2% in Q4, and could be greater depending on the length of the Katrina-related spike in energy costs, as well as the depth of worldwide energy consumption.
Flipside, going into Q1 and Q2 of 2006, and looking forward to 2007, demand driven oil price reduction could be signficant. The length of the gas shock after Katrina, again, is the predominant driver. The longer her impact, the more pronounced the demand cooling. A 30%-35% price drop in crude oil (close to 1.5% of GDP) is reasonable by second-half of '06.
Despite the balancing caused by demand cooling, US GDP growth will be lower in '06 than in '05, and Katrina will help set the ceiling for '06. If 2005 GDP is 3.5%, 2006 looks set to be no more than 3.2% (this is down from a consensus view of around 4.0%).
Further, the liquidity bubble appears more vulnerable than ever with trimmed GDP growth estimates and higher domestic inflation risks. Should liquidity begin to dry up, downside risks abound, especially to the housing sector.
Asia, and China in particular, have significantly more risk. Demand cooling in the US, and any subsequent liquidity crunch results in lower US housing growth (the catalyst for Chinese et al expansion). This combined with high energy prices will force significant weakness in Asian exports over the next six months. I look forward to more detailed views on this from Sharpshanks.
Euro-zone growth is scheduled for a reduction as well. Q2 was better than expected, but the Katrina spike will likely bring full year growth a tenth or two closer to 1%.
My outlook is for significant pullback in equities, and if not, a prolonged period of sagging equity prices. The bond market will rally, and stay up through the close of the year. Glad to be hear, and would love to respond to your feedback.