As Americans bask in a holiday that celebrates their hard work, many will turn their attention to their favorite activity: spending.
Through good days and bad, recessions, even hurricanes, they are unmatched in all the world when it comes to shopping and buying.
For the economy, consumers play a critical role, accounting for at least two-thirds of all activity. And despite their high levels of debt, no slowdown is in sight.
None, that is, unless the rules have changed due to the deep anxiety over the after-effects of Hurricane Katrina and gasoline prices that have topped $3.70 a gallon. Could consumers’ firepower be running out?
More will be known Wednesday, when members of the Federal Reserve provide their beige book, a region-by-region look at the economy. Chicago economist William Hummer says that while the report will acknowledge the impact of the hurricane and stratospheric fuel prices, its overall tone will be positive.
“The damage to Gulf Coast cities is heart-rending and it has caused great consternation, while gasoline prices are very high, but consumers aren’t going to change their habits,” said Hummer, of Wayne Hummer Investments.
In the months ahead, the net effect of the hurricane will be to trim economic expansion by less than one-half of 1 percent, he said. With growth proceeding at nearly a 3.7 percent rate, that won’t be drastic, according to Hummer.
“There certainly is evidence that this will create a dent in the economy, but not a recession,” he said. “Once New Orleans and the other cities start rebuilding, we will see a wave of construction that will provide a resurgence.”
Until recent days, it was considered a no-brainer that members of the Federal Reserve would engineer another quarter-point move higher in their short-term lending rate, bringing it to 3.75 percent, when they meet in about two weeks.
Such a move by the central bank would be the 11th notch higher since it began tightening monetary policy less than 15 months ago.
However, because of the huge spike in energy prices, a number of analysts have said the Fed should take a pass, leaving rates on hold until later this year. Economist Ian Shepherdson says such an outcome is doubtful.
While sky-high fuel costs certainly will hurt the economy, “the marginal effect on spending in the first quarter of next year and beyond will be zero,” said Shepherdson, of High Frequency Economics, Valhalla., N.Y.
His bottom line: The Fed will continue raising rates for months to come.
The stock market has made little progress in the last half-dozen weeks. As Americans pause for Labor Day, the question is whether the fall silly season on Wall Street will erode their investments.
September has become the worst month for stocks, exceeding October in downside disappointments. Some traders try to stay on the sidelines until November, when they hope to catch a year-end rally.
Meanwhile, stock, bond, commodity, futures and options markets, as well as government offices and many businesses, are closed for the holiday. The weekly auction of short-term Treasury debt will take place Tuesday.
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