WE do not yet know enough to make a definitive estimate of the amount of time it will take to get the Gulf coast pipelines, refineries and ports operating at pre-Katrina rates. But we do know a lot more than we did in the immediate aftermath of the storm.

We know that recovery in the private sector is proceeding more rapidly than had been anticipated. At this writing, Colonial Pipeline, which delivers almost 100m gallons of petroleum products to 12 states every day, is capable of running at normal flow. Entergy, the area’s largest electricity supplier, has restored service to more than two-thirds of its 1.1m customers. The Minerals Management Service reports that only (that’s my adjective) about 850,000 barrels a day of oil production is now being lost because of Katrina — about 4% of our needs. Drinking water is beginning to be available in New Orleans, and the polluted stuff pumped out. The port of New Orleans is a few days from re-opening for business.

Meanwhile, the release of internationally held stockpiles of petrol, made available to America after a brief initial resistance by the German finance minister, is driving down prices. Little wonder that share prices have been benefiting from what Wall Street calls “a relief rally” — as in sighs of.

It will probably take longer to get the natural-gas transmission and distribution systems fixed. As a result, inventories will be tight this winter and there is every likelihood that prices will jump as much as 30%.

We know, too, that America has once again benefited from the flexibility and resilience of its free-market economy. Cargoes and freight were quickly rerouted, employment agencies found jobs for many displaced workers, firms arranged living facilities for employees so that they could show up for work, and financial markets efficiently adjusted share prices and futures contracts to take account of the continuing flow of information concerning the effects of the storm. The contrast with the performance of government agencies is stark.

None of this means that the damage was trivial. Insurance-industry sources are predicting the “largest insured loss in history”, perhaps as much as $45 billion — and that excludes flood insurance, which is the responsibility of the federal government.

So much for the immediate impact. The more important question is the longer-term outlook, which can only be appraised against the background of the economic conditions prevailing before Katrina struck a region accounting for 2% of America’s GDP. Those conditions were good enough to have the Federal Reserve Board conclude in its latest report, published last week but compiled before Katrina: “The growth (from mid-July to August) was widespread as retail sales, services, finance, construction, manufacturing, mining, energy, and tourism all expanded.” It doesn’t get much better than that.

As is always the case in a modern economy, so with America pre-Katrina: the economic horizon was not cloudless. Alan Greenspan, Fed chairman, worried aloud about “froth” on regional housing markets, the politicians’ unwillingness to control spending, and imbalances in world trade. But even with these worries, it is unlikely that Katrina will hit the economy hard in the long run.

Former Fed governor Larry Meyers pointed out in an interview, “hurricanes typically have surprising little effect on the economic outlook ... forecasters ... often exaggerate the effects of discrete events”, a view shared by the chairman of the president’s Council of Economic Advisers, Ben Bernanke, who says: “I expect it’s going to be absorbed easily.”

Most forecasters seem to agree with Meyers and Bernanke. Economists at Goldman Sachs are predicting a “near-term loss of output followed by a larger rebound”. And UBS Securities has advised its clients: “We expect the trend in growth will prove more resilient than is now widely feared.”

In the end, the accuracy of all forecasts depends on a big unknown — how government policy will take shape. The president has already asked Congress for some $60 billion for immediate relief and rebuilding, and is expected in the end to demand as much as $200 billion, 10 times what was allocated to New York City after September 11.

Then there is the Fed. The president cannot threaten the central bank’s vaunted independence by suggesting what the chairman should do about interest rates. But insiders tell me George Bush undoubtedly used the occasion of his private lunch with Greenspan to make clear his view that the economy has received a shattering shock. Unspoken subtext: stop those interest-rate increases, at least for a while.

Washington’s politicians think Greenspan would be mad to raise rates on September 20, when the Fed’s monetary-policy gurus convene, since that would antagonise such politicians as Alabama’s Senator Richard Shelby, chairman of the banking committee, and squander political credibility.

Wall Street, on the other hand, is convinced Greenspan will not squander his inflation-fighting credibility by ignoring the fact that the economy is headed towards tight labour markets and rising inflation.

But Wall Street and Washington agree that when the dust settles — more precisely, when the water ebbs — the economy will resume its growth and the Fed will start raising interest rates again.

So look for a drop in the rate of economic growth in the next few quarters from its first-half rate of 3.6%, followed by a rebound; a rise in the federal deficit as a president eager to revive his reputation for “compassion” and a Congress headed for a re-election campaign open their hearts and other people’s purses to the displaced; an increase in the intensity of the will-he-or-won’t-he guessing game as the September 20 date of the next meeting of the Federal Open Market Committee comes closer; and a longer-term return to robust growth.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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