The Blog

After the Storms

What the hurricanes have left in their economic wakes.

12:00 AM, Oct 4, 2005 • By IRWIN M. STELZER
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THE STORM CLOUDS that darkened the skies over New Orleans and Houston have lifted, but those that are darkening the economic outlook remain threatening. Some related directly to Katrina and Rita will pass sooner rather than later. But other clouds might, just might, prove to linger far longer, long enough to create as much economic havoc as the hurricanes created physical havoc.

The storms did have enough impact on the energy system, including offshore platforms, refineries, and pipelines to persuade two-thirds of the CEOs of America's largest companies that their operations will be negatively affected for from three months to a year. Hank McKinnell, chief executive of Pfizer and chairman of the Business Roundtable, foresees "a significant but not catastrophic national effect," and the 97 CEOs surveyed dropped their forecast of annual economic growth this year from a 3.5 percent to a 3.3 percent rate. To this economist, who has always believed that economic forecasters use decimal points to prove they have a sense of humor, this isn't much of a change.

It is obvious that Katrina and Rita added to upward pressure on energy prices, and that higher-cost gasoline and, this winter, natural gas and heating oil, will put a dent in consumers' wallets. This has made always-nervous retailers even more worried than usual as they approach the holiday season. But with inventories of gasoline surprising on the high side, and the reconstruction of damaged facilities proceeding apace, gasoline prices are likely to ease. Add to that the effect of the president's decision to spend whatever it takes to restore New Orleans to its former--one would hope for better than that--condition, and for all intents and purposes the effects of the hurricanes can be filed under the "this, too, will pass" category. James Cooper and Kathleen Madigan, economists at BusinessWeek, estimate that the initial funds authorized by Congress, $62.3 billion, will add some two percentage points to economic growth in the third and fourth quarters. And there is more money to come, although it now is likely that the president, smarting from conservative criticism of his spendthrift ways, will work with Congress to keep the outlays well below the $200 billion originally estimated.

The storms and their effects are not what have serious economy-watchers on edge. Some see a renewed bout of inflation--U.S. and worldwide--in our near-term future. Higher fuel prices are already feeding into higher trucking and transport costs. The spurt in natural gas prices is forcing chemical producers, who use natural gas as a feedstock, to raise prices: Rohm & Haas, a manufacturer of specialty chemicals, says it is raising prices "to offset the jump in raw material, feedstock, energy and freight-related costs . . . ." The prices of lumber and cement, in great demand as the rebuilding process gets underway in the Gulf Coast region, are rising.

Even more worrying is the recent rise in inflation expectations. In August, consumers were expecting the inflation rate to be 3.1 percent; now, they are expecting prices to increase at an annual rate of 4.6 percent. And the price of gold, an historic inflation hedge, is at an 18-year high.

Then there is Alan Greenspan, the chairman of the Federal Reserve Board. Greenspan is warning that consumers might be forced to the sidelines if rising interest rates make it difficult for them to continue borrowing against the value of their homes.

A bit of arithmetic shows why Greenspan has set retailers' teeth on edge. He estimates that the value of what he calls "home equity extraction" added $600 billion to consumer spending power last year, equivalent to 7 percent of personal disposable income, half of which was used to finance trips to the malls and shops. If consumers can no longer "cash out" some of the value of their homes, their spending might drop by an amount equal to 3.5 percent of GDP. All figures approximate, of course: some put the possible drop at 2.5 percent.

This disturbs retailers more than it does Greenspan. He will still exit, smiling, in January, if he is right that this reversal of consumer spending might actually help to increase savings, and cut purchases of imported goods, reducing America's massive trade deficit. That would come in handy right now, since several forces are at work that will drive the trade deficit even higher than its current level of over 6 percent of GDP, believed by most analysts to be unsustainable.