Hurricane Katrina may be remembered as major tipping point for economy

Fed may forgo raising interest rates again at its Sept. 20 meeting

Analysis

September 06, 2005|By Tom Petruno | Tom Petruno,LOS ANGELES TIMES

For the economy and financial markets, Hurricane Katrina may be remembered as a major tipping point.

In the short term the storm may have tipped the Federal Reserve against further interest-rate increases, at least temporarily.

It also may have convinced many consumers that energy prices aren't likely to come down much soon - which could have implications for how (and whether) they spend money in the near future and possibly beyond.

Longer-term, Katrina could tip the scales on the nation's investment priorities, in favor of a greater focus on levees, bridges, roads and other infrastructure that have been allowed to deteriorate.

Investors' first reaction to the storm last week was to buy more of what already has made them big money this year: energy stocks.

By Friday the so-called XOI index of 13 major oil stocks had tacked a 9 percent advance onto what was a 32 percent year-to-date gain at the start of the week.

Wall Street, ever on the hunt for profit opportunities amid human suffering, also snapped up shares of a host of companies whose products or services could be in great demand as the Gulf Coast's recovery proceeds. The list included manufactured-housing makers, engineering companies and timber suppliers.

But the biggest panic-buying wave happened in the Treasury bond market. Sensing that Katrina was enough of a national economic and psychological blow to give the Fed pause in its credit-tightening campaign, some investors and speculators poured into short- and long-term bonds, driving yields sharply lower.

The two-year Treasury note's annualized yield, for example, plummeted from 4.05 percent on Aug. 29 to 3.74 percent by Friday. A meeting Thursday between President Bush and Fed Chairman Alan Greenspan, which Bush requested, just heightened expectations that when central bank policymakers gather Sept. 20 they'll forgo raising their benchmark short-term rate, now 3.5 percent, for what would have been the 11th time since June 2004.

The effects of the hurricane - particularly on gasoline prices because of refinery shutdowns - could quickly drain consumer and business confidence, said Paul McCulley, a managing director at bond fund giant Pacific Investment Management Co. in Newport Beach, Calif.

What's more, "We don't know what the rest of the hurricane season is going to look like," he said.

Lacy Hunt, economist at Hoisington Asset Management in Austin, Texas, believed the economy was downshifting even before Katrina hit. He pointed to slower growth in the U.S. manufacturing sector in August, softness in construction spending in recent months, and Wal-Mart Stores' reports of fewer back-to-school shoppers.

The Fed should show forbearance because Katrina "exacerbates all of our serious energy problems and hits a vital link in the transportation network," the port of New Orleans, Hunt said.

The Los Angeles Times is a Tribune Publishing newspaper.

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