It wasn’t supposed to matter, thanks to Katrina. But today’s retail sales report for August may be relevant after all, despite the fact that the report is a snapshot of consumer habits for the weeks leading up to the hurricane’s attack on New Orleans and the surround region. Yes, it’s hard to ignore the 2.1% drop, the biggest monthly decline in retail sales in nearly four years. Or is it?
Economists aren’t necessarily disturbed by today’s report for retail sales, in part because for the year through August retail sales are still up 7.9%, or more than twice the rate of the latest report o the economy’s growth. “These results [for August’s retail sales] cast more cold water on the notion that if nondiscretionary spending on energy swells, it must crimp discretionary spending. It hasn’t,” says Ken Mayland, chief economist for ClearView Economics, in an interview today with Marketwatch.com “Consumer spending has continued to advance strongly” despite the jump in energy prices in recent years, he observes.
Waiting for Joe Sixpack to crack and cut his credit cards into shreds will have to wait a bit longer. Meanwhile, it’s a thankless pessimism in that it’s been more than a little unsatisfactory over the years in delivering the fatal blow that some say is forever imminent. But if betting against the primary engine of the U.S. economy has been a losing proposition, fear still springs eternal. The current source of that fear, for those who choose to subscribe, is the belief that once the post-Katrina numbers start rolling in–September’s retail sales, for instance–spending will be shown to be in retreat.
And indeed it may prove to be. But if so, that’s not the end of the world, nor necessarily the start of a recession, argues one dismal scientist. “In general, the economy is proving to be resilient to energy and gas price pressure. It’s on a growth path,” Michael Englund, chief economist with Action Economics, tells CNN/Money. “Even though oil prices are higher, the fundamentals of the economy are strong. Therefore, we see consumers’ savings rate falling and spending up.”
To be sure, Katrina’s effect will be seen in the not-so-distant future. The question is, to what degree? Minimal, predicts another obsever of the economic scene. The economy expanded by 3.3% in the second quarter. Assuming that holds, it would be trimmed to roughly 3.1%, courtesy of Katrina, says Michael Cosgrove, an economist at the Dallas-based consultancy Econoclast, in an interview this morning with CS. The Katrina effects could last through the remainder of 2005, he notes. But while the economy may be facing another “modest” slowdown, “it’s nothing to get overly concerned about,” he counsels.
Yes, consumers are overextended, Cosgrove admits, but it’s far from the first time that Joe Sixpack’s found himself in that position. “The consumer’s probably at the point in the economic cycle where his spending slows relative to GDP,” he advises. So why isn’t Cosgrove worried about recession? It comes down to the fact that if job growth holds up, which he expects, that will convince the consumer to keep spending, albeit at slower pace, he reasons.
The combination of Fed interest rate hikes, high energy costs, and Katrina will almost certainly bit the economy, Cosgrove continues. In turn, the Fed will probably stop hiking rates. In addition, he thinks the forces of disinflation will prevail. Overall, the post-Katrina rebuilding phase will kick in during the weeks and months ahead. That means that there will be a burst of spending and job creation tied to the recovery projects. In addition, a resumption of gasoline production from the Gulf region to something approaching normal could help reduce fuel prices. All of which could go a long way in making 2006 another year of economic growth. Yes, next year’s GDP growth could fall to the 2.8-3.0% range, Cosgrove concedes. But an economic doomsday’s nowhere in sight, he forecasts. That is, until the next economic report.