02 Sep 2005 Katrina – A Wake-Up Call On Many Levels?
Our prayers are with those who suffer on the Gulf coast from the destruction of Hurricane Katrina and those who are there to help them. While there is significant coverage of the sensational events stemming from the darker side of human nature, the larger and more important story is of the suffering of thousands who have lost everything and of the efforts of thousands more who are there to help them. Once again, we have an opportunity as to people to come together to help our fellow citizens and be an example to the world. Perhaps the greatest challenge so far has come from the Reverend Franklin Graham as he calls on churches throughout the country to invite some of those homeless into their homes and to help them get them back on their feet.
The week has been a busy one for government data releases, but the suffering of Katrina’s victims and the disruption of energy resources have dominated the news. The dramatic consequences of the storm’s effects on our economy certainly render last month’s data points almost insignificant. But, they can give us an idea of the economy’s momentum as we enter these new challenges. The ill effects of energy prices rising so fast, potential outages of oil, gasoline, and natural gas in some regions, the disruption of shipping on theMississippi River, and the potential indefinite closing of the nation’s largest port all weigh heavily on the growth momentum of the economy.
As we look at the graphs below of oil prices and gasoline prices please note that their steady rise over the past twelve months. Note too that gasoline rose almost vertically in the days following Katrina, in fact by 18%. The reason is that gasoline supplies were more acutely impacted by the storm. Gasoline refineries are off line and awaiting the restoration of electricity and no one really knows how long that will take.
Oil prices have not spiked as much because the President has authorized tapping of the Strategic Oil Reserves to supply the demand of energy companies. Additionally, today the International Energy Agency announced that it was considering releasing 2 million barrels of oil a day for the next 30 days to theU.S.to ease shortages. Europe is concerned aboutAmerica’s energy shortages to the extent that it could stallU.S.economic growth which is driving the global economy now.
Gasoline prices dropped 7% this morning on that news and that gasoline pipelines are being repaired and capacity is returning. You can see the drop on the right hand chart. Prices have a considerable distance to fall before reaching pre-Katrina levels, but as refineries and pipelines are repaired, they should.
The nation’s unemployment rate dropped from 5% to 4.9% in August as the economy added 169,000 jobs. Average hourly earnings also increased .1% in August, but well below the increase of .4% the month before. On an annualized basis, hourly earnings are rising at 2.7%, just over the inflation rate of 2.5%. A disturbing fact though is that the nation’s saving rate is now negative. Americans on average are spending more than they are earning.
The net effects of these shocks are yet to play out in the economy. It remains to be seen whether the Federal Reserve will pause in their interest rate increases, but the likelihood is certainly increased, given recent economic data. Our portfolio strategy remains very conservative. We have increased exposure in utilities and consumer non-durables as we get more defensive in our Quality and Income accounts. In our Quest accounts we have added Clean Harbors, an environmental remediation company and Headwaters, an alternative energy developer. We also believe that our purchase of Toyota Motor will do well as the company is leader in hybrid car production and development.
The energy issue is a long-term one that has significance beyond the scope of this Brief. It remains seemingly unimportant to government policymakers. Katrina has illustrated all too clearly just how tight energy supplies are right now, but it is not our first wake-up call. We suffered significant economic downturns in the 70’s and 80’s as oil supplies were constrained, yet we did not seem to learn anything. Neither conservation measures nor alternative fuels have been pursued to any great extent. Oil supplies will not last forever. How much longer and how many more shocks do we need to wake up to the fact that energy cannot be taken for granted?