The first hard numbers on the economic damage caused by hurricane Katrina are in and the news isn’t good: plunging factory orders, soaring costs and the biggest jump in jobless claims in nearly a decade.
Reports released yesterday confirm the U.S. economy took a significant hit when Katrina slammed into the Gulf Coast on Aug. 29.
The impact is showing up in swelling ranks of the unemployed and in the factory sector, where companies are facing shortages, higher prices and weaker demand for their products.
The storm shut down the city of New Orleans, destroyed 275,000 homes, and put a large dent in the U.S. production of oil and refined petroleum products, such as gasoline.
Yesterday, a top White House economic adviser acknowledged that Katrina’s effects are starting to bite.
“In the shorter term, the devastation wrought by hurricane Katrina will have a palpable effect on the national economy,” said Ben Bernanke, a former U.S. Federal Reserve Board governor who chairs the White House Council of Economic Advisors.
Four days after the storm, U.S. President George W. Bush predicted the economic effects of Katrina would be “temporary.”
But economists warned that the effects of the hurricane, including higher fuel costs, could linger for much longer.
Initial jobless claims shot up 71,000 to 398,000 last week, and virtually all of the increase was because of the storm, according to the U.S. Labour Department. It marked the sharpest rise in weekly claims for unemployment benefits in nine years, eclipsing the weeks after the Sept. 11, 2001, terrorist attacks.
Economists predict the next few weeks could be even worse as more of the 1.1 million American evacuees from the Gulf Coast start looking for work.
“We are probably not seeing the full effect of the disaster on claims yet,” said economist David Rosenberg of Merrill Lynch & Co. in New York. “Anecdotal evidence suggests that some companies initially kept employees on their payrolls.” The Labour Department conceded that state authorities in the Gulf Coast region, who have been deluged with claims, may be late in processing many of the newly unemployed.
When the final tally is in, the number of Americans with jobs could plunge by as much as 250,000 this month, Mr. Rosenberg predicted in a report to clients.
Others have predicted that the storm could ultimately put 900,000 people out of work. In New Orleans, the jobless rate could reach a staggering 25 per cent, up from less than 5 per cent last month.
Meanwhile, a key survey of manufacturing activity in the mid-Atlantic region, hit hard by oil pipeline shutdowns after the storm, showed a marked slowdown. The Philadelphia Federal Reserve Bank reported that factory activity in the mid-Atlantic region stalled this month as new orders plummeted and costs doubled, based on a survey of purchasing managers.
“The effect of Katrina is quite apparent, not only in purchasing managers’ view of the present, but also in their view of the future,” said Phillip Neuhart of Wachovia Securities in Charlotte, N.C.
The business activity index fell to 2.2 from 17.5 in August — well below the reading of 14 that economists had expected and just barely above the critical zero mark. A negative number indicates shrinking manufacturing activity.
The decline was driven by tumbling orders, sharply higher costs for items such as energy and a more pessimistic outlook for the months ahead, the Philadelphia Fed reported. A similar survey of manufacturing activity in New York also slumped, but not as significantly. The Empire State Survey slipped to 17 from 23 in August.
The data come days before Tuesday’s Federal Reserve Board meeting. In spite of post-Katrina economic weakness, most economists expect the Fed to raise key short-term interest rates by another quarter percentage point to 3.75 per cent when it meets Sept. 20.
Even before the hurricane, energy prices were up sharply across the United States, according to the consumer price index, also released yesterday. Inflation surged 0.5 per cent in August — much of the increase attributable to a 5-per-cent rise in energy prices — the largest spike in more than two years. The price of gasoline rose 8.3 per cent.
The so-called core inflation rate, which excludes food and fuel, was up a modest 0.1 per cent. Helping to keep prices down was a decline in car prices.
The Katrina effect
Early economic indicators show the hurricane’s damage to the world’s largest economy is likely to be dramatic, pushing up prices while hurting economic growth
68,000: Number of jobs lost to Katrina so far. Another 182,000 claims are expected this month.
x2: Factor by which costs paid by manufacturers in Northeastern U.S. increased in September.
85%: Share of businesses surveyed by the Philadelphia Federal Reserve Bank that said Katrina has hurt orders.
$3.07 (U.S.): Average U.S. gas pump price last week, up from $2.61 the week of Aug. 29. Globe & Mail