Economic Reports Raise Worries
Americans’ savings rate fell to an all-time low in July while manufacturing showed signs of slowing in August, worrisome economic news amid uncertainty over how Hurricane Katrina will hit the U.S. economy.
A group of economic reports Thursday showed that the economy was buffeted by high oil prices even before Katrina shut down production along the Gulf of Mexico this week and sent the price of gasoline and other products soaring.
The Commerce Department reported that consumer spending rose by 1% in July, matching a strong June gain, as Americans streamed into auto showrooms to take advantage of sales enticements.
Incomes rose by just 0.3%, however, not enough to cover the increased spending. As a result, the savings rate fell into negative territory at minus 0.6%, the lowest level on record.
That negative reading meant Americans did not have enough left over after paying their taxes to cover all of their spending in July. As a result, they dipped into savings to cover the shortfall.
Big retailers reported Thursday that sales held up well in August even in the face of rising energy costs.
But now with gasoline topping $3 a gallon in many parts of the country because of Katrina-forced refinery shutdowns, the worry is that consumers will be forced to cut back on discretionary purchases, especially given their stretched family budgets and record low savings.
“The economy is going to be hit hard by Katrina, and it is going to be hardest on consumers who are already stretched thin,” said Mark Zandi, chief economist at Economy.com. “With the surge in gasoline and home heating-oil prices, consumers will have a difficult choice to make between filling their gas tank or spending on other things.”
Another report showed that American manufacturers were feeling the adverse effects of higher energy costs even before Katrina hit.
The Institute of Supply Management’s manufacturing index declined to a weaker-than-expected 53.6 in August, down from July’s reading of 56.6. Although that level still indicated that factory output would expand in coming months, manufacturing is about three times more sensitive to rising energy costs than the overall economy because manufacturing is so energy-intensive.
In other economic news, the Labor Department said the number of Americans filing new claims for unemployment benefits rose by 3,000 last week to a seven-week high of 320,000. Those claims numbers are expected to rise significantly in the weeks ahead, as hurricane-damaged businesses lay off workers in Louisiana and other states.
The government also reported Thursday that construction spending was flat in July after a sharp 0.6% drop in June, giving a possible indication that one of the economy’s strongest sectors may be starting to slow under the effect of rising interest rates. The June decline, which was revised from an original estimate of a 0.3% drop, was the biggest setback since a 1.7% drop in January 2004.
Ian Shepherdson, chief U.S. economist for consulting firm High Frequency Economics, predicted that construction would be one of the areas to see a boost in coming months, reflecting substantial rebuilding activity along Katrina’s path.
