Damian Dovarganes  /  AP file
Consumers cut back their spending in August — even before Katrina struck — and their confidence in the economy is slipping, economic data released Friday shows.
updated 9/30/2005 6:25:46 PM ET 2005-09-30T22:25:46

Hurricane Katrina has knocked the economy for a loop, and whether it revives or slips into recession depends on whether nervous consumers are willing to spend more.

New figures on Friday showed the storm caused incomes to fall in August, reflecting $100 billion in losses by people who didn’t have adequate insurance to cover damage to homes, businesses and vehicles.

The Commerce report showed that spending was on the skids even before Katrina struck. Soaring gasoline prices caused consumers to reduce spending by the largest amount since the September 2001 terrorist attacks.

The 1 percent drop, after adjusting for inflation, reflected not only the pain at the gas pump but a cutback in spending on new cars after two big sales months due to attractive incentives from automakers.

The impact of $3-per-gallon gasoline is taking a toll on consumer confidence. The University of Michigan reported Friday that its confidence survey for September fell to 76.9, the lowest level in 12 years. The August and September declines are the biggest back-to-back drops on record.

“High gas prices had a devastating impact on consumers’ budgets and caused consumers to expect a worsening financial situation during the year ahead,” said Richard Curtin, director of the Michigan survey.

Analysts said they still expect the economy to rebound from the hurricane and energy-related blows but cautioned that statistics over the next two months would look grim.

“We are starting to get early estimates of the impacts of Katrina and they are ugly,” said Joel Naroff, chief economist at Naroff Economic Advisors.

On Wall Street, investors were encouraged to see crude oil prices ease slightly with a price of a barrel of light crude dropping 55 cents to $66.24 in New York trading. The Dow Jones industrial average gained 15.92 points Friday to close at 10,568.70.

The Commerce report on incomes and spending estimated that Katrina resulted in $100 billion in property loses not covered by insurance. The report estimated that $70 billion in insurance payments would be made.

Without the impact from the uninsured losses, the government estimated incomes would have risen by 0.2 percent in August. In the government’s accounting method, both the losses and the payments were recorded on the day the hurricane hit.

Major Market Indices

Because Katrina came ashore on Aug. 29, the August income report did not reflect job losses from the storm. That negative hit to incomes will appear in the September report and also will be evident in the September unemployment report, scheduled to be released next Friday.

The consensus view is that jobs will fall by 172,000 in September as the layoffs from the hurricanes overwhelm job gains in the rest of the country. The unemployment rate, which had fallen to a four-year low of 4.9 percent in August, is expected to climb to 5.2 percent.

The sharp drop in spending even before the storms and the big drop in consumer confidence raised concerns about consumers’ staying power. Consumer spending accounts for two-thirds of all economic activity.

“Consumers are reeling from the high energy bills and that has to be watched very carefully,” said Mark Zandi, chief economist at Economy.com. “Another month of falling consumer confidence would be disturbing.”

Economists are worried that the surge in energy prices could rattle consumers so much that the economy will be pushed into a full-blown recession.

However, they still rate that outcome as a low probability, saying the more likely impact from the hurricanes and soaring energy will be a reduction of a full percentage point in growth in the current July-September quarter, pushing growth down to around 3 percent, and a further slowdown in the fourth quarter with growth coming in at 2.8 percent. They expect stronger growth next year from hurricane rebuilding.

The Congressional Budget Office said on Thursday it is more optimistic that the hurricanes’ impacts will be limited, predicting that much of the slowdown will be contained to the July-Septmeber quarter.

Income after adjusting for taxes fell by 0.1 percent in August while Americans’ personal savings rate remained in negative territory for the third straight month at minus 0.7 percent, a slight improvement from the all-time low for savings of minus 1.1 percent in July.

When the savings rate is in negative territory, it means that Americans are not only spending all of their after-tax income but they are dipping into savings accumulated in earlier months to finance spending.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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