09 Sep 2005 How Much Economic Impact From Katrina?
Inflation talk is picking up as Fed governors and economists speak these days. This week, the Labor Department trimmed its estimate for non-farm business productivity growth in the second quarter to a 1.8% annual rate from 2.2%. That’s down from a 3.2% pace in the first quarter. The Labor Department also said labor costs rose more sharply in the second quarter than it first estimated, and that labor costs rose in the year ending in June at the fastest pace in five years. Labor costs are the biggest generator of consumer inflation.
Strong productivity growth in recent years has kept a lid on inflation as the economy has grown robustly. But many economists have been waiting for a decline in productivity, which could let inflation creep in. More evidence of diminishing productivity could keep Federal Reserve policy makers raising short-term interest rates, as they have done steadily for more than a year. However, investors in large part are hoping the Fed will pause until it gets a better sense of Katrina’s economic impact.
It will be a while before the scope of the storm’s economic impact is clear, but according to the Wall Street Journal, the Congressional Budget Office offered a guess, saying the storm could shave up to one percentage point fromU.S.economic growth in the second half of the year and cost some 400,000 jobs.
Oil and gasoline prices are falling as more information comes in about when supplies and refineries will be back to capacity. Oil prices have risen the last couple of days, but it has fallen about 7.5% since its Katrina highs. Gasoline fell 11.4% before rebounding a couple of percentage points in the last two days. The average U.S.pump price for a gallon of regular fell to $3.018 yesterday from a high of 3.057 reached on September 2nd according to AAA. The high represents a 65% increase from a year earlier.
U.S. oil and gasoline production may not recover as fast as earlier hoped. Royal Dutch Shell said today that output may not resume from its Mars Field until 2006. The field accounts for 15% of U.S. Gulf output. The Department of energy reported yesterday that Gulf oil production was 60% below pre-storm levels and that four refineries will take three months or more to start.
Economic forecasters predict the U.S. economy will grow at a 3.6% annual rate in the third quarter instead of the 4.1% range predicted a month ago, primarily because of surging fuel prices. But asU.S.and global economies slow, the demand for fuels will decline, easing tight supplies. As more production capacity comes on line further downward pressure on prices should occur.
The economic effects of the Katrina will obviously impact our economy, but the degree is the question. The Federal Open Market Committee meets on September 20th. If they decide to stand pat for a while it could provide a slight boost for stocks. If they continue with their increases it will be a slight negative as investors have already begun factoring in the possibility of a pause in rate increases. We will see.
