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Last
quarter I discussed the economic impact of the gulf hurricanes. This quarter
I would like to elaborate on their effects on the overall state of the
economy. There seems to be a considerable amount of concern over the
direction of the national economy. Everyone should realize that the health of
the state and regional economies are very much dependent on the national
situation. Events happening elsewhere in the world have a direct effect upon
our lives in
Wisconsin.
For example, the gulf hurricanes' impact on energy supplies was quickly felt
in our area. As a result of the disruption in energy supplies, this winter's
heating bills are projected to be well above last year's levels; 50 to 70
percent by some forecasts.
If
confirmed by the U.S. Senate, Ben Bernankee will succeed Alan Greenspan on
February 1st as the chairman of the Federal Reserve Board. As head
of the nation's central bank, Bernankee will play a key role in formulating
monetary policy. The following provides an overview of the economic
conditions that the new Federal Reserve chair will face and the issues he
likely will have to address. The gross domestic product grew at a robust 3.8
percent during third quarter of 2005. For the previous seven quarters GDP had
been averaging a 3.7 annualized rate of growth. Economists generally believe
a rate above 3.0 percent represents a healthy amount of expansion. In
contrast, industrial production, another measure of economic activity,
experienced anemic growth over the past several quarters. Industrial
production expanded by 1.5 percent and by 1.1 percent in the second and third
quarters, respectively. Also, the leading indicators composite index has been
trending lower since early summer. Moreover, the consumer confidence survey,
administered by the
University
of Michigan, fell dramatically in September. Clearly the impact of Katrina,
Rita, and Wilma weighed heavily upon the minds of the survey's respondents.
In
addition, the consumer price index rose at an annualized rate of 4.7 percent
in September. If we exclude the volatile energy and food components the core
consumer price index increased by 2.0 percent on an annualized basis.
Moreover, unemployment claims were pushed much higher due to the hurricane
activity in the gulf. The U.S. Labor Department reported that over the past
two months that there have been over 500,000 claims turned in which can be
directly attributed to the gulf storms.
The
consensus forecast seems to be that the economy will avoid a recession. That
is, many of the hurricane related items will play themselves out and the
rebuilding effort in the gulf region will provide a huge amount of stimulus to
the economy. Having said that, a number of analysts are very concerned about
upward pressure on the price level and how it may eventually lead to higher
wage levels. This economic environment will force the Federal Reserve to
continue its policy of raising interest rates and tightening credit
conditions. This is often enough to slow the economy but also consider that
rising interest rates could cause a sharp decline in housing prices. On the
east and west coasts, according to most, a housing bubble exists. A larger
drop in housing prices could cause consumer spending to contract. Alan
Greenspan indicated in a speech that borrowing by consumers against their
residences added over $600 billion worth of spending to the economy in 2004.
This represents about 5 percent of GDP. While no one is suggesting that a
rise in interest rates would erase $600 billion worth of spending, it is clear
that a sharp decline in housing prices would have a substantial impact on
consumer spending. Given these issues and growing concerns about our
dependence on foreign savings to finance domestic expenditures, it is becoming
increasingly clear that Benankee and the Federal Reserve will have little room
for error in formulating monetary policy. |
