Investors will have the weekend to ponder if Hurricane Rita will deliver the knock-out blow to the economy that Katrina threatened but never delivered. But some have already decided that the twin storms together won’t be enough to derail U.S. GDP from its momentum. One research paper published this week even suggested that hurricanes actually boost economic growth.

Nonetheless, the American economy was slowing before Katrina, and the dynamic hurricane duo could exacerbate that trend, or so one could argue. Ed Yardeni, chief investment strategist with Oak Associates, for one, lowered real (inflation-adjusted) GDP estimates to 2% from 3%-to-4% for Q4 2005 and Q1 2006, courtesy of the recent weather. That ain’t hay, as the saying goes. But neither is the downshift permanent, or so Yardeni forecasts. Writing today in an email to clients, Yardeni advises that by next year’s second quarter “I foresee 3%-4% real GDP growth resuming.” (If so, will that be evidence of hurricane’s growth inducing powers?)
Yardeni’s an optimist, at least by the standards of the latest forecast from the IMF, which projects U.S. GDP growth will touch just 3.3% for all of next year.
Does the bond market share Yardeni’s optimism, or the IMF’s more middling expectations? Hard to say, although by today’s trading it appears the fixed income set is more inclined to keep a watchful eye over the weekend rather than make heavy bets one way or the other. The yield on the 10-year Treasury Note moved up slightly on the week, closing today’s session at around 4.25%.
Might the bond market be struggling to come to terms with a fear of higher inflation on one hand, and a hurricane-driven slowdown on the other? Indeed, gold jumped to the $475-an-ounce level, marking an 18-year high. No less a force than the Federal Reserve seems inclined to take gold’s view in that inflationary momentum, however moderate at the moment, could gather steam in 2006. Ergo, yet another interest rate hike this week by the central bank.
As David Gitlitz, chief economist with TrendMacrolytics, writes in a research note today, “The worst-case scenario for additional energy supply disruptions arising from Hurricane Rita also implied a worst-case inflation outlook resulting from the Fed accommodating
the consequent energy price spike, as seen in the gold price rallying to the $475 level.”
But at the end of the day, a realist has to admit that rising energy costs cuts two ways. It’s at once a force for slowing the economy (at least initially) and raising inflation. Correctly predicting which facet will dominate the other could be the secret for successful trading in the weeks and months ahead. Unfortunately, no one has a crystal ball. Opinions, of course, are passed around like beer at a picnic. That includes analysis today from JP Morgan global economist David Hensley, who tells Reuters:
“If we get another big ratchet up in fuel prices, then all bets are off — not that we’re forecasting recession but we’re looking at the potential for a more severe slowdown in the U.S. economy. The more severe the slowing, the greater the possibility of ripple effects into the corporate sector. If corporates begin to scale back, then you’re in a different ball game altogether. The stakes are pretty high here.”
The stakes are high, and the outcome is still unknown. Monitoring Rita’s impact on Texas, including its oil infrastructure, is job one at the moment. On that front, she’s been downgraded to a category 3 storm earlier today. But such definitive analysis eludes the dismal science on gauging her impact. Yes, Virginia, it could be a long weekend.