Brooklyn's Progress
October/November 2005

By Joel L. Naroff, Ph.D.

Welcome to the world after KatRita, the two hurricanes of the century. Thankfully, Rita did not cause the massive damage of Katrina. But it still created problems. So, now we are faced with cleaning up the mess, but first we have to figure out how the economy was affected.

We are just now beginning to get an idea of the hurricanes’ economic costs and the impacts are not quite as clear as we thought they might be. On the one hand, manufacturers may be getting a positive kick from the loss of inventories and the need to clean up and rebuild the Gulf Coast. Those at the front line of the economy, the purchasing managers, said conditions improved markedly in September. Orders poured in too fast to be met. With firms facing rising backlogs, we can expect production and hiring to remain solid. 

But, although the nation’s industrial base may be benefiting initially from the need to deal with the storms’ destruction, the rest of the economy did not do nearly as well. The supply managers in the service sector were as downbeat about conditions as their manufacturing partners were upbeat. Demand slowed sharply and this might just be the first sign that all the problems facing the consumer have finally created some real changes in spending habits.

The overriding issue facing both businesses and households is energy prices. Firms are complaining that their costs are rising extremely sharply. The hurricanes made a bad energy situation worse and companies are saying they are looking to increases prices.  That’s a worry, because if that does happen, inflation will accelerate.

Inflation has been and continues to be job one for the Federal Reserve. The FOMC increased interest rates for the eleventh time in September. The Fed did this even though the full impacts of the hurricanes were not at all known. That says the concerns about inflation are building and are overwhelming any worries about economic growth.

The rising interest rates and energy costs are hitting many families hard. Is it any wonder that households are beginning to lose confidence and are cutting back? At least people are starting to fight back. They have cooled their love affair with gas guzzling SUVs. Although buying more energy efficient vehicles makes sense, it will take a lot more than that to break the back of the high energy costs.

In spite of all the uncertainty and the problems facing the economy, businesses have not packed it in. While there were fewer people on payrolls in September than in August, the job loss was less than expected. Companies had ramped up hiring during the summer, cushioning the losses from the hurricanes. 

In a nutshell, the accounting of Katrina’s and Rita’s costs has only just begun. Although we can take some heart from the so far relatively limited national impacts of the Gulf Coast devastation, the lingering effects will be with us for a long time. 

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank is a leading financial services retailer with more than 340 convenient stores in New Jersey, New York, Pennsylvania, Delaware and new markets Connecticut, Washington, DC and Virginia. The Bank will expand into southeast Florida in early 2006. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.