Storms May Slow Growth In '05, Says Economist, But Will Help During '06

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Despite the hysterical proclamations by some economists in the wake of the devastation of New Orleans and other cities in the Southeast by Hurricane Katrina late last month, the economy is "doing pretty good," according to Dr. Martin Regalia, the chief economist for the U.S. Chamber of Commerce.

"In the first couple of days after Katrina, some economists predicted a loss of 1.5% GDP growth. Today, cooler heads have prevailed," Regalia told attendees of WesCorp's CU Outlook conference here last week. "The Katrina effect will be decreasing growth early, but then increasing growth in early 2006 thanks to rebuilding efforts. Overall, GDP growth will remain 3.3% or above throughout the horizon forecast."

Regalia noted the Federal Reserve Board had raised the Federal Funds rate to 3.75% earlier in the day. He predicted interest rates would continue to increase "moderately" in the months to come, and said the Fed will raise the Federal Funds rate two or three more times before "taking a break; sitting back to admire their handiwork."

"This will take us into next year. Some economists think the economy is in really good shape, and believe the Fed will continue to raise rates throughout all of 2006, up to 5% or 5.5%, but I don't think so," he said.

Asked if CUs should fear a flat or inverted yield curve, Regalia said such an event is a possibility. "It is moving in that direction. Short-term rates possibly could be modestly above long-term rates. However, given wage inflation is well behaved and productivity is behaved, we should see a relatively benign interest-rate cycle."

Regalia said he is unconvinced the much-feared and much-discussed "housing bubble" exists. He observed Fed Chairman Alan Greenspan began using a new word to describe the housing market in recent months-"froth"- which means "a lot of little bubbles."

While there could be some local market problems, Regalia does not see any indication of an event that could cause a large-scale affect on the national housing market.

"The housing market is solid, and household wealth is solid," he assessed. "Consumer debt is not dropping appreciably, but it has plateaued. The unemployment rate was 4.9% in August, which is pretty close to what economists call 'full employment.' If it gets much lower, there might be pressure on wages."

While gross inflation measures such as the consumer price index and the producer price index seem to show some upward pressure, Regalia pointed to the core consumer price index, which strips out volatile food and energy commodities. The core index is just above 2%, or "right about where the Fed wants it to be."

"Any lower than 2% risks deflation. This number will allow the Fed to continue its gradual, measured increases in interest rates."

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