Storm Hits Industrial Output

Hurricane Katrina hit U.S. industrial output hard last month and retail sales retreated, but the underlying economy looks strong and probably will prompt the Federal Reserve to raise interest rates again.

A Fed report Wednesday showed August industrial output growing just 0.1%, in the first big economic indicator to exhibit major fallout from the storm, which struck two days before the end of the month.

Utilities and mining output were particularly hurt, sliding 0.5% and 0.6% respectively, and the Fed said Katrina cut industrial output 0.3 percentage point overall. But in a sign of an otherwise healthy industrial sector, manufacturing output rose 0.3%.

“Stripping out the negative hit to production from Katrina, identified by the Fed, the underlying results were solid,” Morgan Stanley economists wrote in a note to clients.

Separately, the Commerce Department said August retail sales fell 2.1%, the largest drop since November 2001. Sales excluding autos, however, climbed a stronger-than-expected 1%, showing strong demand before Katrina struck.

The surge outside the automotive sector encouraged some analysts to ramp up forecasts for third-quarter growth. It also reinforced expectations that the Fed would raise interest rates again at its meeting Tuesday, lifting its benchmark short-term rate by another quarter percentage point to 3.75%.

The Commerce Department said it had to estimate results from some retailers in its survey because of Hurricane Katrina, but it expected the effect to be small because the storm-affected region accounted for barely 1% of national sales.

“Sales ex-autos were decidedly stronger than people had given credit for,” said Steve Ricchiuto, chief U.S. economist at ABN Amro in New York. “This is an important piece of information on where the economy was prior to Katrina.

“People who were really slashing third-quarter [gross domestic product] forecasts might need to rethink,” he added. “The economy was more resilient than people thought. It supports the thesis that the Fed will raise rates in September at least.”

Wall Street analysts had forecast retail sales to decline 1.2% after July’s 1.8% gain. But sales were held back by a record 12% drop in motor vehicle and parts sales despite continued heavy discounting by dealers.

Retail sales outside of the auto sector rose 1%, compared with expectations for a 0.5% advance. But much of the rise was a pure price effect after gasoline surged, a gain that continued into September after the storm drove prices well above $3 a gallon in many places.

The Commerce Department said August gas station sales were up 4.4%. Retail sales excluding motor vehicles and gasoline gained 0.5% after an unchanged reading in July, it said.

Analysts fear that high energy prices could sap consumer spending, on top of any negative fallout from Katrina, although evidence so far has been mixed.