COMMERCE BANK ECONOMIC REVIEW - November 2005

So Far, the Economy Has Weathered the Storms

By Joel L. Naroff, Ph.D.

The chaos and pandemonium of the post-Katrina period is behind us. Of course, if you live in south Florida, you are likely just beginning to get back to normal after Wilma blew through, but we are talking clean up, not massive rebuilding. The question is: How well did the economy come through the storms? The answer: okay.

We got our first peek at the impacts of the hurricanes on the economy and they were bad, but not catastrophic. Let’s take the employment situation. It is estimated that Katrina cost the Gulf region more than 400,000 jobs. In September and October, there were a total of about 25,000 jobs created. It seems that in the rest of the nation, more than 210,000 people were added each month. That’s quite decent. And the unemployment rate, which had edged up to 5.1% in September, fell back to August’s 5% rate in October. In other words, the labor market did not skip.

Indeed, growth during the summer, which included Katrina and Rita as unwelcome visitors, was a robust 3.8%. Of course, there was a lot of help from massive government spending. Some of it may have even been worthwhile. But it wasn’t just FEMA spending like it had a blank check, which it did, or the military doing its part in bringing order out of the chaos. Every sector pitched in. Consumers emptied their wallets and businesses invested. 

But things are changing. For three months now, households have treated motor vehicles like the avian flu. They have stayed far away from dealerships. They are still buying other goods but, undoubtedly, consumption will be quite soft this quarter.

Which brings up the critical holiday shopping season. Will it be good, bad or indifferent? While like any good economist, I would like to answer “yes,” that would be skirting a critical issue. There are potential problems in mallville.

The key issue remains energy. Yes, the price of gasoline has come down sharply, but you can hardly call $2.30 for regular cheap. And now we are starting to turn on our heating systems. I have tried to keep mine off, but we did get some cold days and nights. Skyrocketing heating costs are being added to elevated gasoline prices and that is still causing many families to feel a cold chill run through their budgets.

Businesses also are feeling the pain. They have to pay all those expenses as well, and they finally are opening their windows and yelling, “we can’t take it anymore!”  Firms are looking to add to revenues and that is causing inflation expectations to rise. Even my favorite vice, Tastykakes, announced a price increase. Woe is me.

The Fed recognizes the inflation risk and raised interest rates once again to 4%. More important, the prime rate – to which many consumer loan rates are pegged – hit 7%. In addition, longer term rates – such as mortgages – are on the rise. 

When you put this all together, the pressure on household budgets remains strong. That indicates that the holiday shopping season could be a disappointment. It will be interesting to see what Black Friday – the day after Thanksgiving – brings. 

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America's Most Convenient Bank, is a leading financial services retailer with more than 345 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. Headquartered in Cherry Hill, N.J., Commerce Bancorp (NYSE: CBH) has $36 billion in assets and, in third quarter 2005, achieved a deposit increase of deposit increase of 29% and total asset growth of 28%. For more information about Commerce, please visit the company's interactive financial resource center at commerceonline.com.