Economy

Sept. 13, 2005

There's no question the U.S. economy will take a hit from the hurricane. Economists now estimate growth of 3.5% (at an annual rate) in the second half of the year, down from the pre-storm expectations of 4.0%. And for many companies the short-term demand benefits will be more than offset by cost pressures since manufacturing is, on average, three times as energy intensive as the rest of the economy. (For example, there isn’t a large amount of gasoline that is used in creating a loan file.) And some industries use far more energy than others: for makers of clay tiles, it is 10%, for lime manufacturers (cement), it is 17%. So while many U.S. manufacturers are gearing up for demand in everything from wallboard and washing machines to water towers, they are seeing supply glitches and rising prices, particularly for petroleum based raw materials.

The key economic news this morning was August’s Producer Price Index, +.6%, but ex-food and energy it was unchanged. Both numbers were lower than expected, and Treasury & mortgage prices are better because of it. The “headline” PPI was boosted by oil and gasoline prices. A rising core PPI will eventually force producers to raise prices to consumers. We also saw the Trade Balance data which showed a deficit of $57.9 billion, down slightly from the prior month. Although we have the Consumer Price Index later this week, remember that analysts are putting less emphasis on the PPI and CPI releases this month because the reporting period is pre-hurricane and wont show the effect of the increased energy prices. And most economists believe the Fed will raise rates 25 basis points at the 9/20 meeting.