Economy Weathers Hurricanes
Many parts of the country managed to log decent economic activity in September and early October even amid the soaring energy prices and other repercussions from hurricanes Katrina and Rita.
The Federal Reserve's survey released Wednesday provided the latest snapshot of business conditions nationwide in the aftermath of Katrina, the most costly natural disaster in U.S. history, and Rita.
"Economic activity continued to expand ... Most districts described the pace of activity as moderate or gradual," according to the Fed survey.
Meanwhile, the Commerce Department reported that housing construction unexpectedly rose in September to the highest level in seven months, at least temporarily defying expectations of a slowdown in the booming housing market.
The Fed's survey is based on information collected before Oct. 11 and supplied from its 12 regional banks.
Katrina ripped through parts of Louisiana, Mississippi and Alabama in late August, destroying businesses, homes and lives. The blow was compounded by Rita, which struck on Sept. 24. Both hurricanes hobbled important oil and gas facilities along the Gulf Coast, pushing energy prices even higher.
Against that backdrop, all Fed regions reported rising costs for energy, building materials, shipping and other things, the survey said. Several regions suggested that some of these increased costs are being passed along to consumers in the form of higher retail prices.
"Chicago cited price increases for pharmaceuticals and air travel. In Richmond and Atlanta, retailers and other business firms reported passing their cost increases through into their selling prices, and in Philadelphia and Dallas, large numbers of business firms said they have raised, or plan to raise their prices," the Fed survey said.
Others Fed regions suggested that businesses are being more restrained in raising prices to consumers. The San Francisco region reported that consumer prices have remained stable, while Boston and Chicago reported that the ability of local businesses to raise prices was limited.
The Fed's survey will figure into the discussions and decision-making of Fed policy-makers at their next meeting on Nov. 1.
Many economists believe the Fed will boost short-term interest rates by another quarter percentage point to 4 percent at the November meeting to fend off an outbreak of inflation. Such a move would mark the 12th increase of that size since the Fed began to tighten credit in June 2004.
Fed policy-makers at their last meeting on Sept. 20 suggested that inflation posed a bigger risk to the country's economic health than the prospects of major slowdown in economic growth.
Private economists believe fallout from the hurricanes will reduce economic growth over the rest of the year by as much as a full percentage point. While that would slow the U.S. economic expansion, it wouldn't derail it, analysts said.
Federal Reserve Chairman Alan Greenspan, in a speech on Monday, said global economic growth also will be constrained by the sharp rise in energy prices brought on by the two hurricanes.
"Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," he said. Greenspan, however, didn't quantify how much of a slowdown will occur.
The Commerce report said that construction of new homes and apartments rose by 3.4 percent last month to a seasonally adjusted annual rate of 2.11 million units, the fastest pace since last February.
Analysts had been forecasting that housing construction would decline by 1.7 percent in September, believing that increases in mortgage rates would finally start to cool the red-hot housing market.
They were also surprised that the area of the country with the biggest increase in activity was the South, the area that was hit by hurricanes Katrina and Rita.
"Not even Mother Nature can slow the housing market," said Joel Naroff, chief economist at Naroff Economic Advisors, a private consulting firm.
On Wall Street, the Dow Jones industrial average was up more than 20 points in late morning trading.
In addition to the big jump in construction activity, the level of applications for building permits rose to 2.4 percent to a seasonally adjusted annual rate of 2.19 million units in September, the fastest pace in more than 32 years.
Even with the surge in construction and permits, analysts said they still expect housing to slow next year under the impact of rising interest rates. But they said reconstruction efforts in the hurricane-devastated areas would cushion the decline somewhat.
Freddie Mac reported that 30-year fixed-rate mortgages hit 6.03 percent last week, the first time they have been above 6 percent since last March. Economists predict that those rates will continue to rise as the Federal Reserve keeps pushing interest rates higher to combat inflation pressures spawned by this year's surge in energy prices.
The 3.4 percent increase in construction reflected strength in both single-family and apartment activity. Single-family home construction rose by 2.6 percent to 1.75 million units while multifamily construction rose by an even stronger 7.8 percent to an annual rate of 361,000 units.
The report showed that the rise in building activity was led by a 6.9 percent increase in housing activity in the South, where the pace of building rose to a seasonally adjusted annual rate of 198,000 units. The government said that this increase was not affected by the hurricanes which hit areas that account for just 2.3 percent of total home building in the South.
Housing construction was up 1.9 percent in the Midwest to an annual rate of 368,000 units. Two regions showed no gains in September. The Northeast remained at an annual rate of 198,000 units, the same as August, while the West remained at an annual building rate of 561,000 units.