September 06, 2005
The calm after the storm
Time to assess the storm damage. From an economic point of view, it looks costly, but manageable.
Let's start with energy markets, which were the focus of much of the original discussion of the potential economic damage from Katrina. Fifty-eight percent of Gulf of Mexico crude oil production remains shut in, down from the 95% shut-in rate last Tuesday, and implying so far a loss of nearly 13 million barrels of oil production since the storm began. Even so, the October light crude oil futures contract closed today below $66 a barrel on the New York Mercantile Exchange, lower than its value before the storm.
A bigger concern had been the effect of the storm on U.S. gasoline supplies. Of the 1.8 million barrels per day refining capacity idled by the storm, 4 refineries representing over a million barrels per day capacity have now restarted or are expected to be restarted this week. The October gasoline futures contract on NYMEX has dropped 35 cents a gallon in the last two sessions. It now stands 87 cents a gallon below the high reached for the September contract in last Wednesday's hectic trading, and is just 20 cents a gallon higher than its value had been before the storm. Some wise policy decisions by the U.S. government and very welcome assistance from other countries doubtless also helped to calm these markets.
Natural gas, for which nobody can do much to increase short-run imports, appears to have been the most significantly affected, with the NYMEX October contract still up 19% from its pre-storm value.
Brad Setser also calls our attention to New Orleans' unique role as a port through which many U.S. exports are shipped. Barges carrying grains, goods, and oil had been simply stalled on the river. The Port of New Orleans is now back in limited operation. The September and December corn futures contracts traded on the Chicago Board of Trade, as well as the September and November soybean futures contracts, are all up in price since August 26, suggesting that the market is calculating that this will eventually be sorted out in a way that does not significantly disrupt the ability to find buyers for these basic crops.
And then there are the 620,000 people who were employed in the greater New Orleans area as of June. Some of these-- such as those for the oil producing, refining, and port operations noted above-- are so vital economically that they're going to be employed one way or another, housed in tents, if need be. But those employed by the vast infrastructure that supported them-- cab drivers, school teachers, sales people-- are hardly about to return to the same sort of work any time soon. Will the pundits who fret and frown over each 10,000 bump in the monthly employment statistics be content to dismiss the September figures that are surely in store as just a hurricane asterisk? It is hard to believe that a dislocation on this scale could fail to have economic consequences that extend well beyond the Gulf.
Finally, there is the ever-present question of what will the Fed do? I think-- and hope-- that they will take this as an opportunity to pause and see what these developments will bring. The market-- which thinks but does not hope-- seems to believe that they might do just that.
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Posted by James Hamilton at September 6, 2005 03:54 PMdigg this | reddit
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» Carnival of the Capitalists - Hosted by Evelyn Rodriguez from Crossroads Dispatches
Rethink(IP) did such a fine job of presenting the Carnival of Capitalists last week that it's a tough act to follow. Thanks - I think - for setting such a high bar. It's always an overwhelming task to compile the [Read More]
Tracked on September 12, 2005 03:54 AM
I agree with just about everything you say, and would like to think that I anticipated at least the second half of this post, in my post of 8/31 in the "recession" thread.
Posted by: Jonathan at September 6, 2005 08:25 PM
"Finally, there is the ever-present question of what will the Fed do? I think-- and hope-- that they will take this as an opportunity..."
I am in agreement with the whole thrust of the post. On the last 'detail', I think its a very close call.
But consider this. The fed has made a very big deal of stressing the distribution of risk, upside or downside, and of identifying situations where that risk is asymmetric. Now what we have is 'measured raising', and one of the virtues of this is that it goes in 'baby steps'. So I think the decision - which will really depend on how one or two key people incline - will hang on whether you give more importance to the value to be garnered from not rising one extra quarter point now, or to the danger that you could give the wrong impression to global markets (who always seem to suspect that Greenspan knows more than he's telling) and have a more negative impact on global growth expectations than would be justified by the US impact of not raising. The more I think about it, the more this latter one convinces me.
And remember, with measured increases, you could pause next month and/or the one after, when the Katrina effect will have been much better assimilated. I think in terms of helping to sustain US growth towards the back end of this year working with the IEA to keep supply at the pumps steady could be much more important than any interest rate decision of this magnitude.
But, as I say, its a very close call (in every sense).
Posted by: Edward Hugh at September 7, 2005 12:49 AM
Oh, yes, I've just come up with another reason why the Fed may go ahead and raise, the OECDs Jean-Philippe Cotis just advised them not to:).
The OECD delivered recommendations to each of the four most important central banks, some of which will not be received gratefully.
Mr Cotis said he thought the underlying strength of the US economy left it well placed but the rise in oil prices without any corresponding pick-up in core inflation meant monetary policy tightening could be slowed.
�The Federal Reserve should continue to move back towards neutrality, although possibly at a more measured pace than hitherto,� Mr Cotis said.
I mean, who am I to bicker with an 'expert' like Cotis, but what could be more measured than what we've been getting up to now?
And is he so incompetent that he doesn't realise he should be keeping his mouth shut in this moment, especially if he wants the result he is arguing for. Hmmmmmm.
Posted by: Edward Hugh at September 7, 2005 02:28 AM
Well, this news just about settles it for me:
"U.S. worker productivity grew at a slower-than-expected pace from April through June and labor costs accelerated, which may prompt the Federal Reserve to keep raising interest rates."
Posted by: Edward Hugh at September 7, 2005 06:20 AM
Todays Wall Street Journal lead editorial got it exactly right. Lower gas taxes simply increases profits and/or increases consumption so that severe shortages ensue.Am I the only one who sees those politicians as being the most cynical bas-----on earth? Either way the pols will (are already) blame the oil companies.
Posted by: howard weston at September 7, 2005 08:41 AM
Thanks for this useful analysis, Prof. Hamilton.
It strikes me that what you've accomplish here is not simply economic analysis, but an important kind of citizen journalism.
I realize that citizen journalism was probably not your intent, and that you might not choose to describe yourself as a citizen journalist. However, in my posting today to ireporter.org (http://www.ireporter.org/2005/09/economic_analys_1.html) I've explained my reasoning. I'd be curious to hear what you think. If you could comment back on my post, I'm sure my readers would find it enlightening.
- Amy Gahran
Posted by: Amy Gahran at September 7, 2005 09:34 AM
Jim and Company,
So, there is another "cost" for which accurate numbers do not seem at all available. I am talking about the number dead. All kinds of people in positions of authority are declaring that it will be "in the thousands," possibly even 10,000, or more than the 8,000 or so who died in the Galveston hurricane of 1900, the deadliest natural disaster in US history.
However, a quick but hard google search turns up that the last time actual verified numbers were reported was Sunday, when only 59 dead had been identified in Louisiana with another 160 in Mississippi. I keep hearing and reading of bodies being found in the water, and of one building that had 30 dead, but have seen no new hard numbers. Why is that?
The odd thing is that there is a real possibility that those numbers might in the end prove to be much less than many are now forecasting, possibly even less than the thousand or so who died in the Shia stampede last week in Baghdad, which got nearly zero coverage here in the US (and which much of the rest of the world holds us at least partly morally responsible for).
The way I see it, by now most houses in New Orleans have been at least initially contacted. There are probably still some dead bodies in some of them, possibly many. Certainly there will be the predicted bodies at the bottom of the water, and more may still die from disease if that breaks out. But most people have already gotten out or been found, and so far the only official number for NOLA is still under 100. What will it actually be? I remind everyone that the initial estimates of the dead in 9/11 were exaggerated, if not by all that much.
Posted by: Barkley Rosser at September 7, 2005 01:42 PM
Democratic muck-racking site Raw Story claims that the refinery shortage is because of the evil oil industry deliberately reducing refining capacity through a series of anti-competitive moves:
Posted by: Dan at September 7, 2005 06:08 PM