- The Washington Times - Wednesday, September 7, 2005

ASSOCIATED PRESS

Factories were chugging, cash registers were busy and jobs were growing in the late summer — fresh proof that the economy was in fine fettle before Hurricane Katrina slammed into the Gulf Coast, spreading death and destruction.

The Federal Reserve’s latest snapshot of business conditions across the country, released yesterday, was taken before the hurricane struck last week. The storm knocked out essential oil and gas facilities, choked transportation and shipping and wiped out businesses and homes.

Now private economists and the Congressional Budget Office predict fallout from the storm will cause overall U.S. economic activity to slow in the second half of this year by one-half to a full percentage point on an annualized basis. Jobs also are expected to take a hit in the coming months.

The Congressional Budget Office is predicting a total of 400,000 job losses through the end of this year. Privately insured losses could exceed $30 billion, and gasoline prices in September will rise much higher than would otherwise have been the case, the agency said.

Prices for lumber, coffee and a variety of other goods also are likely to head up given disruptions wrought by the storm and high fuel costs to transport goods, private economists predicted.

Against this backdrop, overall consumer prices in the second half of this year are now expected to be higher than analysts were anticipating before the storm.

Before the storm, “except for energy, overall consumer price increases were modest,” over the past two months, according to the Fed’s survey.

The Fed also found that manufacturing activity increased in most of the Fed’s 12 regional districts, retail sales and tourism activity strengthened in most regions and the jobs climate improved — all before Katrina hit.

Economic uncertainty from the disaster is leading some economists to predict that Fed policy-makers will forgo raising short-term interest rates at their next meeting on Sept. 20. Such a move had been considered a virtual certainty. Others, however, continue to believe the Fed will boost rates at that time to keep inflation under control.

“While Katrina could lead to a postponement of the inevitable, it is pretty clear that barring a crippling impact from Katrina, the Fed will, sooner or later,” need to boost rates to fend off inflation, said Steve Stanley, chief economist at RBS Greenwich Capital.

The Fed’s survey also found that the housing boom showed “signs of softening in some markets,” the Fed survey found.

The Fed districts of Kansas City, New York, Philadelphia and Richmond all observed strong home sales, “but signs of cooling were evident,” the survey said. Some areas reported that residential construction activity was brisk but down from a year ago. St. Louis described such activity as “lagging.”

The Fed’s survey is based on information collected before Aug. 29 and supplied from its 12 regional banks.

In other economic news, growth in U.S. workers’ productivity slowed in the spring, while labor costs picked up — developments that could raise concerns about an inflation pickup down the pike.

Productivity — the amount an employee produces for every hour of work — rose at an annual rate of 1.8 percent in the April-to-June quarter, the Labor Department reported. That was down from a 3.2 percent pace in the first quarter and was the smallest gain since the summer of 2004.

Unit labor costs, meanwhile, rose at 2.5 percent rate in the second quarter, slightly higher than the 2.2 percent growth rate in the prior quarter. Unit labor costs measure how much companies pay workers for every unit of output they produce.

While wage gains are good for workers, a big and sustained pickup in wage growth can raise concerns among economists about an unwanted pickup in inflation.

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