- The Washington Times - Tuesday, August 30, 2005

ASSOCIATED PRESS

An abundance of jobs helped push consumer confidence higher this month, but the optimism could be short-lived as the pain at the gasoline pump becomes more acute.

Soaring energy prices also may be starting to harm manufacturers as the Commerce Department reported yesterday that factory orders in July fell by the largest amount in 15 months.

Energy costs, already at record levels, are being driven even higher after Hurricane Katrina’s devastating strike along the Gulf Coast, which has shut down oil rigs and petroleum refineries. Oil prices briefly traded at a new intraday high of $70.85 per barrel yesterday.

The concern is that surging energy costs at some point will cause consumer confidence to falter, resulting in a cutback in consumer spending, which accounts for two-thirds of total economic activity.

However, the Conference Board reported yesterday that consumers remained optimistic in August despite the surge in energy costs. The board’s index rose to 105.6, up from a revised 103.6 in July.

Analysts said that strong job growth so far was offsetting the rise in energy costs.

“It may be hot and energy prices may be scorching consumers, but as long as jobs are available, people seem to be happy,” said Joel Naroff, head of Naroff Economic Advisors, a forecasting firm.

Mr. Naroff and other economists said it was an open question how long the economy can stand up to a relentless rise in energy prices that has socked motorists during the summer driving season. It is expected to do further damage with winter heating bills.

“Because the economy is strong and job growth is strong, the consumer has not felt much pain, but that is likely to change in the next few months,” said Nariman Behravesh, chief economist at Global Insight, an economic consulting firm in Lexington, Mass. “I think we are headed for a period of economic weakness mostly related to the oil situation.”

Although economists think the economy is powering ahead at a rate above 4 percent for the July to September quarter, Mr. Behravesh said, that could slow dramatically to about 2.5 percent in the final three months of this year, reflecting the drag from higher energy costs.

Separately, the Commerce Department reported yesterday that orders to U.S. factories fell by 1.9 percent in July, the biggest drop since a similar decline in April 2004. Some economists attributed part of that weakness to rising concerns by businesses about how strong demand will remain given this year’s upswing in energy prices.

Still, economists said the economy’s huge head of steam going into the final months of the year should be enough to keep the country out of a recession.

“There is a lot of momentum in the economy,” said William Cheney, chief economist at John Hancock Financial Services in Boston, who said that even Katrina could turn out to be a positive for economic growth as billions of dollars are spent on rebuilding.

The Federal Reserve, which has been pushing interest rates higher over the past 14 months to make sure inflation remains contained, discussed at its Aug. 9 meeting the threat that surging energy prices and a strengthening job market might be setting the stage for increased inflation pressures.

However, Fed policy-makers again decided that other factors were likely to offset those pressures and allow the central bank to keep raising rates in small quarter-point steps, according to minutes of the discussion released yesterday.

The drop in factory orders was led by an 8.8 percent plunge in the transportation sector as orders for both commercial and military aircraft suffered big declines. Orders for cars and trucks posted a 3.7 percent increase in July after a decline of 1.6 percent in June.

Orders for all durable goods, items expected to last at least three years, were down 4.9 percent in July, unchanged from a preliminary reading last week. Orders for nondurable goods — products such as food, clothing and gasoline — rose by 1.7 percent in July after a 0.2 percent decline in June. However, much of that increase reflected higher prices for petroleum products.

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