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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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September 9, 2008

Hurricanes put energy on center stage

Hurricane season is in full swing here in the Southeastern United  States. The Atlanta Fed pays particular attention to hurricanes for two reasons: (1) they have significant impacts on the local economies they strike, and (2) they can potentially have big impacts on the national economy.

For example, in 2005, even though the Katrina and Rita storm-damaged area of Louisiana represented only a small fraction of the nation’s gross domestic product (GDP), it cast an outsized shadow because of its very large role in oil and gas production and processing. Katrina and Rita’s disruptions of this production and processing spilled over into the national economy, destroying 113 offshore oil and gas platforms and damaging 457 oil and gas pipelines. This damage generated uncertainty about the availability and price of energy products, causing prices to immediately jump.

After relatively quiet hurricane seasons in 2006 and 2007, 2008’s hurricane season thus far has been quite active, with potentially significant national implications. That’s because the Gulf of Mexico remains a substantial source of oil and natural gas production—just as it was three years ago. In addition, coastal Louisiana is the home to upwards of 50 chemical plants, which produce 25 percent of the nation's chemicals that are used in a wide variety of products such as medicines, fertilizers, and plastics. Compounding the Gulf Coast’s concentration of oil, gas and chemicals is the fact the U.S. economy is in a weaker state today and, as a result, more vulnerable to economic shocks than in 2005, a point made in a recent CNNMoney article about Hurricane Gustav.

One of the questions we are often asked is, “what is the effect of a hurricane on the economy?” Not surprisingly, the answer depends on what “the economy” refers to. From a national accounting perspective, GDP is a measure of the nation’s current production of goods and services; thus GDP is not directly affected by the loss of property (structures and equipment) produced in previous periods.

However, there are usually second-round GDP effects that arise because of disruptions to production, income and consumption flows. The Bureau of Economic Analysis provides a good description. For example, in the short run after a hurricane, incomes in many industries are likely to decline because of cuts in production, while some industries involved in the cleanup and repair may see activity increase. Similarly, incomes and spending could increase in areas that are the recipients of evacuees. The net effect of these flow disruptions on GDP over time is often not large because lost output from destruction and displacement is offset by a big increase in reconstruction and public spending later.

But even if the effects are neutral on a national scale a storm’s impact can be long-lasting in an affected locale. For instance, the flooding associated with Katrina left the economy of New Orleans devastated, and in many dimensions it has not fully recovered three years after the storm. Air traffic through New Orleans International Airport increased 13 percent in June 2008 compared to a year earlier but still remained well below pre-Katrina levels. Hurricane Gustav resulted in another evacuation of the city and the cancellation of numerous tourist and other events. Clearly storms like this have the potential to wreak havoc on the prosperity of the Crescent City.

The Atlanta Fed regularly reports on regional economic conditions on its public Web site. As part of its efforts to monitor storm effects—both local and national—the Atlanta Fed is also providing information on post-storm conditions in the affected areas. So far, these reports have focused on Hurricane Gustav’s impact on key energy and transportation infrastructure. The Bank will provide similar updates on other storms, including Hurricane Ike, which had entered the Gulf of Mexico at the time of this posting.

By John Robertson and Mike Chriszt in the Atlanta Fed’s research department

Note: Macroblog will not feature postings on monetary policy issues during the Federal Open Market Committee meeting blackout period, which runs from the week before the FOMC meeting until the Friday after it. Also, David Altig, senior vice president and research director of the Atlanta Fed, will not post during this time frame.

October 7, 2005


That seems to be what everyone expected from today's release of the September employment report. Calculated Risk points out that collecting this month's data required a few creative adjustments to the usual process, but there was no shortage of commentary ready to declare the report as pretty good news. From MarketWatch:

Hurricane Katrina blew away a quarter of a million jobs, but outside of the battered Gulf Coast, job growth remained healthy in September, government data released Friday show...

U.S. nonfarm payrolls fell by an estimated 35,000 in September, the first decline in more than two years, the Labor Department said Friday.

The unemployment rate rose as expected to 5.1% in September from 4.9%, as 270,000 Americans joined the ranks of the jobless.

The decline in payrolls was much less than the 150,000 drop expected by Wall Street economists surveyed by MarketWatch...

The Commentary in the blogoshpere has thus far been more skeptical.  Barry Ritholtz says we should just consider this report a mulligan, Calculated Risk asserts that it will probably be months before we get the true picture, and pgl at Angry Bear just hopes there is nothing ugly hidden among the data uncertainty.  All of that seems hard to argue with.  Nonetheless, one of the things that got my attention was this (again from the MarketWatch article):

In addition to the better-than-expected September results, payrolls in July and August were revised higher by a total of 77,000 jobs. Job growth has averaged 194,000 per month over the past year.

To me, that is starting to look like pretty healthy net job creation.  And I don't quite agree with this statement from Calculated Risk:

The jobs report can be summarized: Construction hot, manufacturing not, Katrina impact unclear. As is usual, construction added jobs while the downward trend in manufacturing continued. In fact, manufacturing jobs (14.234 million) are at the lowest level since 1950.

Not that the statement is wrong.  It's just incomplete.  While it is true that manufacturing job growth is virtually nonexistent, that is nothing new.  And while job gains were had in construction -- as has been the case for awhile -- outside of retail sales advances in employment were broad-based.  Here is the detailed story in pictures:

Manufacturing lost 27,000 jobs...

... and retail a whopping-looking 88,000 jobs:

That looks to me like the real news of this report, as growth in most other industry categories held pretty close to recent form.  Construction gained 23,000 jobs...


... but in addition we added 11.000 in the financial activities sector...

...  52,000 in the business and professional services area...

... 49,000 in education and health services...

... while the government kicked in another 31,000:


Overall, that is not a bad set of pictures.

UPDATE: More, from the Skeptical Speculator.

October 3, 2005

September Bounce?

Just when we thought we had it figured out, the predictions of a hurricane-related slowdown take a hit from the latest data from the manufacturing sector.  From the Institute for Supply Management:

Economic activity in the manufacturing sector grew in September for the 28th consecutive month, while the overall economy grew for the 47th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew for the 28th consecutive month in September based on the ISM data. The PMI made a strong move to the upside as New Orders and Production rose significantly. This move was supported by slower deliveries and growing order backlogs. While energy prices and the impact from Hurricane Katrina are major concerns, the manufacturing sector has regained significant momentum."

The advances were broad-based...

Of the industries reporting in September, 15 registered growth: Tobacco; Paper; Electronic Components & Equipment; Apparel; Instruments & Photographic Equipment; Wood & Wood Products; Chemicals; Primary Metals; Food; Textiles; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Furniture; Printing & Publishing; and Fabricated Metals.

... and the employment index continued to advance:

ISM's Employment Index registered growth in September for the third consecutive month. The index registered 53.1 percent in September compared to 52.6 percent in August, an increase of 0.5 percentage point. An Employment Index above 48.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

The price picture wasn't so cheery...

The ISM's Prices Index jumped again in September as the Prices Index rose to 78 percent, up from 62.5 percent in August. September's jump of 15.5 percentage points follows a jump of 14 percentage points from July to August.

... but it is worth pointing out that these reflect the prices producers pay, which may or may not manifest themselves at the consumer level.

In other news today: Another record high for construction spending in August.  That's largely pre-Katrina information, but it may not matter.  From Reuters, via ABC News:

The Commerce Department said Hurricane Katrina, which battered the U.S. Gulf Coast at the end of August, had no impact on the month's numbers and should have a minimal effect on construction spending for 2005 as a whole. This is because the hardest-hit states - Louisiana, Mississippi and Alabama - accounted for slightly more than 3 percent of total construction spending last year, the government said...

Despite a growing chorus of concern, the U.S. housing sector has shown little sign of cooling off from a multiyear rally that has seen home prices rise by double-digit percentages in some areas. Some economists expect 2005 to be another record year for sales and building, although they maintain the sector should begin to ease in 2006 as long-term interest rates rise and dampen demand.

I'm not sure, but I'd bet we said the same thing about this time last year.  In any event, the betting now begins on whether this sentiment, from Bloomberg, will still look like truth when all of the month's data comes rolling in:

The Institute for Supply Management report suggests that economic recovery from Hurricanes Katrina and Rita may be more rapid than analysts expected.

UPDATE: Mish provides a less optimistic interpretation of the ISM report.

September 13, 2005

A Little Of This, A Little Of That From The Forecasting Pros

Yesterday's mail brought the latest edition of the Blue Chip Economic Indicators newsletter, which rounds up the current thinking of the nation's "top analysts."   The survey results were collected on September 1 and 2, so the news associated with Katrina was still pretty raw.  According to the editors:

The effects of Hurricane Katrina – perhaps the costliest natural disaster in American history – were just beginning to be assessed when we conducted this month’s survey on September 1st and 2nd. Without reliable information and the situation rapidly evolving, the forecasts submitted to us this month appear to represent an attempt by many of our participants to provide an early post-Katrina assessment of the outlook while others are updated, but pre-Katrina takes on the economy. A handful of our regular participants choose not to provide forecasts this month, saying it was premature to attempt an assessment of Katrina’s effects.

The results are sort of interesting, nonetheless.  The consensus estimates for real GDP growth barely budged: Forecasted growth for all of 2005 was marked down to 3.5 percent, from an estimate of 3.6 in August.  The 2006 forecast fell from 3.3 percent to 3.2 percent.  The expected rate of change in the Consumer Price Index for 2005 crept up from 3 percent to 3.1 percent. For 2006 the consensus rate of inflation rose to 2.7 percent; the early August guess was 2.5 percent.

Not much drama there.  What caught my eye was this question and response:

If the [2-year/10-year] yield curve does invert, with [sic] that signal to you a sharp slowing of economic growth within the next 12 months?
(Percentage of those responding)
Yes 40.9%                       No 59.1%

Econbrowser will beg to differ, I bet.  On the other hand, the great majority don't expect this to happen, even though expectations for the federal funds rate still look fairly aggressive relative to current long-term interest rates:

What will be the FOMC’s Federal funds rate target at the end of 2005 and 2006?
FOMC’s Federal funds rate target at end of:
                    2005          2006
Consensus   3.97%         4.24%

You might infer from this that the survey respondents are expecting  to finally see some persistent northward movement in longer-term interest rates, and you would be correct.  The consensus forecast for average 10-year Treasury yields in 2006 is 4.9 percent.  And yes, that increase is expected to bite the housing market...

Will residential investment ADD TO or SUBTRACT FROM real GDP growth in 2006?
(Percentage of those responding)
Add To           Subtract From
27.3%                72.7%

... but in light of the overall forecast, the belief must be that it will be little more than a nibble.