As searchers continue to plumb the waterlogged remnants of New Orleans and other hurricane-beset communities of the Gulf Coast, the question is whether the storm’s aftereffects will weigh on Americans’ willingness to spend.
The annual back-to-school buying spree is nearly ended, but year-end holiday shopping begins shortly. Yet as gasoline prices bubble to new heights and the storm’s body count continues to rise, consumers could show signs of pulling in their horns.
Yet some economists say it is time to look beyond the next several weeks. By Thanksgiving, they insist, the rebound effect of the recovery from Katrina could be so powerful that it will lift the economy.
In the meantime, Wednesday’s report of August retail sales will offer clues about how much erosion has occurred in consumer confidence as a result of fuel prices, if not the hurricane. Economists are looking for a decline of 0.4 percent, following a 1.8 percent leap a month earlier and an advance of 1.7 percent in June.
Chicago investment manager Marshall Front said, “The initial reaction of consumers was to stay home and hunker down. However, they will soon revert to type and start spending again.”
However, in addition to the hurricane’s damage, Americans are facing pressures not only from fuel prices but from rising interest rates, said Front, of Front Barnett Associates.
“We expect the economy to slow somewhat by the end of the year, trimming its growth rate from around 4 percent to something nearer 3 percent,” he said. “Consumers will keep on spending as long as employment continues to grow. However, at this point they are beginning to temper their behavior – even buying a bit less gasoline.”
Most observers expect the Federal Reserve to boost its benchmark rate when it meets in little more than a week, but others say the decision is up for grabs. If the central bank pulls the trigger, it would mark the 11th rise in the short-term rate in less than 15 months.
Chicago banker Kenneth Skopec says that Fed Chairman Alan Greenspan “is under tremendous pressure and it would be shocking if he were to encourage a rate increase at a time like this.”
The economy may be facing a loss of as many as 450,000 jobs as a result of the hurricane’s damage, said Skopec, of MB Financial Bank, and there could be other negative fallout as well.
“The chairman realizes that this is an extremely difficult moment for the country, and he will be wise to encourage at least a brief hiatus in the program of tightening credit,” he said. “There are too many unanswered questions on the table for the Fed to act quickly.”
The stock market has made modest gains through the first 10 days of September, normally a jittery month for Wall Street. With only three weeks remaining in the year’s third quarter, investors are awaiting corporate warnings about potential earnings shortfalls.
So far, such confessions have been relatively few and mild; however, any increase in the flow of bad news could shake a market that has remained remarkably steady through the hurricane crisis.
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AP-NY-09-09-05 1754EDT
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