Hurricane Ike More Likely Than Gustav to Cause a Recession

When Hurricane Ike hit the Texas coastline this past weekend, it was a Category 2 storm, the same as Hurricane Gustav. However, it appears to have caused more damage, wrecking oil pipelines in the Gulf of Mexico and destroying 10 Gulf offshore oil rigs. Although oil prices have dropped, gas prices rose to as much as $5 a gallon. That's because gasoline inventories are low in the area. This part of Texas is home to a quarter of U.S. crude oil and refinery production.

It is also home to $1 trillion of insured commercial and residential property, with $70 billion near the shore and $900 billion further inland. Fortunately, hurricanes usually lose power the further inland they go, although Ike had a very wide path. It is too soon to say how much damage Ike caused inland.

In 2005, Hurricane Katrina cost the economy $125 billion. GDP growth dipped from 3.8% in Q3 to 1.3% in Q4. Since the economy was still growing strongly, by Q1 2006 GDP growth had bounced back to a robust 4.8%.

This year, with the economy struggling to escape a slump, a 1% decline could throw the GDP growth rate into negative territory. When combined with the negative growth rate in Q4 2007, this would qualify as a technical recession.

For more on the potential economic impact of Hurricane Ike, see How Will Hurricane Ike Affect the U.S. Economy?

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