- The Washington Times - Friday, September 30, 2005

Hurricane Katrina slashed income by $100 billion and added to a record plunge in consumer sentiment as it put nearly 300,000 people on the unemployment rolls over the past four weeks, reports showed yesterday.

Even before the storm struck, sharply higher gasoline prices helped to push consumer spending down by the most since the September 11 terrorist attacks, the Commerce Department reported.

The 1 percent drop in spending in August, adjusted for inflation, likely was the start of a consumer pullback that has continued or gotten worse as gas prices soared to records over $3 a gallon.

“This was bad, but September is going to be terrible,” when the full effect of the storm and above-$3 gas prices hit consumer spending, said Christopher Low, chief economist at FTN Financial.

“Consumers are clearly shaken badly by the storm,” he said. That can be seen in the University of Michigan’s consumer-sentiment index, which fell by a record amount in August and September to the lowest level in more than a decade.

The university’s report yesterday showed no rebound in sentiment as gas prices receded below $3 briefly in mid-September. Since then, they have ticked back up again in response to widespread outages of oil and gas production by Hurricane Rita.

Consumers appear to be responding by cutting back on driving, purchases of cars and discretionary items. Auto manufacturers report a retrenchment in sales and the Energy Department said demand for gasoline has dropped 2.8 percent from last year’s levels in the month since Katrina struck.

The pullback in demand helped to prevent a huge surge in pump prices after Rita like the one that stunned consumers in Katrina’s wake. Prices spiked overnight in Washington this week, but nationwide, the average price remains subdued at about $2.80 a gallon.

Richard Savage, a researcher at Bank of America, said he worries consumers are experiencing sticker shock and balking at $3 gas.

“We have concerns that we have reached a price level that’s going to have a real impact on demand,” said Mr. Savage. “The market will become increasingly concerned about the slowdown in demand.”

Fears about a withdrawal by consumers weighed on stock, oil and gas markets this week, despite shortages of fuel from prolonged outages prompted by Rita.

Seven refineries in Louisiana and Texas remain flooded, damaged or out of power a week after the hurricane, on top of the four refineries shuttered by Katrina. Nearly 100 percent of Gulf oil production and 80 percent of gas production remains shut down.

Two of the nation’s four Strategic Petroleum Reserve sites also are without power and unable to supply crude oil to refiners, the Energy Department reported.

Despite the accumulating shortfalls of fuel, oil and gas prices declined yesterday in New York trading partly on worries about a retrenchment by consumers. Some deliveries of oil from reserves here and in Europe also have helped to calm fears about fuel shortages.

The loss of income sparked by Katrina will be a substantial weight on consumers, economists say. The storm caused an immediate, uninsured loss of $100 billion in business and rental income, at an annual pace, the Commerce Department said.

That is likely to be only partially made up by $70 billion in insurance payments, it said.

The 279,000 people who have applied for jobless benefits because of job losses precipitated by Katrina also are suffering income losses that unemployment checks will only partly make up. Many more unemployed people may not be eligible for the benefits.

Despite the mounting losses, many analysts remain confident that the economy received only a glancing blow from the storms and will rebound with gusto.

Thousands of workers are being hired to clean up and rebuild after the storm, and provide housing and other supplies to the displaced, said Dan North, chief economist at Euler Hermes, a credit insurance firm.

A burst of rebuilding activity was seen in reports yesterday, showing a resurgence of manufacturing activity in Chicago and New York last month after an initial retrenchment caused by Katrina.

“I especially see a growth in the construction sector for devastated regions like New Orleans, much like the rise in building activity in Florida the year after Hurricane Andrew,” said Mr. North.

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