Not everyone believes that high oil prices, or the aftermath of Hurricane Katrina, will have a significant impact on the U.S. economy.
Ajay Kapur, global strategist at Citigroup, says the U.S. is a "plutonomy;" an economy powered by the wealthy. Whilst the average consumer devotes 7.8 percent of their total expenditure to energy-related products, high-earners devote just 6 percent. "They account for the bulk of consumption and are relatively unscathed by high oil prices," Kapur says.
Kapur also argues that the main reason that past oil prices have been associated with recessions has been the response of the monetary authorities. "The key for equity investors is to closely track leading indicators of core inflation to anticipate the likely monetary response. So far they are not worrisome," he says.
Jim Paulsen, chief investment strategist at Wells Capital Management, is also sanguine. "Unless crude oil prices rise further from here, the national economy and financial market fallout from this event will diminish. The consumer sector appears about as strong as it has in the entire recovery; real labor compensation is growing at a strong 6 percent, household jobs have risen at an average monthly pace of 287,000 through August, retail sales have been strong, consumer confidence measures are OK, housing and auto sales remain high and household net worth is at all-time record highs."
Paulsen also points to the decline in bond yields, which has lowered mortgage rates. "Given the importance of housing in the contemporary cycle, the decline in long-term yields is probably much more stimulative than the rise in crude oil is contractionary."
The Organization for Economic Co-Operation and Development maintained its forecasts of 3.6 percent U.S. growth this year, saying it was too early to gauge the hurricane's economic impact.
Market reaction so far seems to suggest that equity investors have accepted the views of the optimists while bond and currency investors have inclined to the pessimistic camp. The belief that the Federal Reserve will stop raising rates has prompted falls in bond yields and in the dollar, which may lose some of its allure to income-seeking investors.