None of the latest economic data matter; everything that’s been coming out is pre-Hurricane Katrina. Those data all show a strong economy, and one that should withstand the shock of Katrina well, if allowed to. That is, there will be a tendency to over-tinker, to want to speed recovery up, which often results in just making things worse. But believe it or not: so far, so good.
I started writing this column on Thursday, September 1, and by Friday afternoon, I was already trashing what I had written as too pessimistic. It seemed that power to critical pipelines to the mid-Atlantic, Midwest, and Northeast were being returned to service sooner than expected. Power to refineries, which will take time to scale up to full production levels, was also restored earlier than expected, though some refineries will be off-line for a while. This was confirmed by yet more news reports on Tuesday.
The Port of New Orleans is an essential link for the shipment of grain and other critical items, and that will take a while to get into service again. But other ports will come into play, and undoubtedly, there will be higher costs and shipping delays as logistics get ironed out.
There is no doubt that the combination of the tragic loss of lives, the displaced hurricane victim families and the time it will take to clean up debris and control the resulting environmental issues will have significant costs. New Orleans was not the best run city before, a city of lost economic opportunities, and therefore lacks the resilience for a quick bounceback.
That being said, the U.S. economy is in for a tough four to six weeks of higher prices for petroleum goods. These are likely to have a dampening effect on the entire economy during that time. From an economic perspective, a disaster of this magnitude has less effect in a healthy economy than in a slowing one, which was the case when the 9/11 attacks occurred.
Prior to Katrina, unemployment dropped to 4.9%, with payrolls up by 169,000. June and July’s payroll employment was revised up an additional 44,000. The household data were up by a whopping 373,000 in August. Considering that there were approximately 600,000 workers in the Hurricane Katrina-affected Gulf Coast area, assuming that none are working and all are seeking work, that would translate to a 5.3% unemployment rate. Because not all of those will be seeking work in the short term, they would not be officially reported as unemployed. One should expect that at a minimum the unemployment rate will jump to 5.2%, and that 5.1% is definitely in the cards. Over the next two weeks, initial jobless claims should jump dramatically, perhaps double, and then in about four to six weeks start heading down to the 350,000-400,000 level. Many displaced workers will never return to the New Orleans and Gulf Coast area, and will find work and housing in other areas such as Texas, whose economy is larger and more robust than that of Louisiana, Mississippi, and Alabama.
Net new businesses increased yet again, but this measure will be seriously flawed because of Katrina for a few months to come. Some of the economic data may have a “recession feel” to them, but it will be temporary.
The ISM Manufacturing Index dropped slightly, from 53.6 to 53.3, which still indicates a growing economy. Inflation concerns were rising at the time, mostly oil and energy related. This will not get better any time soon, as oil will not return to pre-Katrina levels for at least a year, but those prices will retreat over the next couple of months.
The ISM's non-Manufacturing Index jumped from 60.5 to 65.0, a significant rise, showing a strong service economy. Prices actually eased in the report, and the employment portion of the index was up from 56.2 to 59.6, which was also worth noting.
How strange that these economic events are occurring now. Hurricane Katrina won’t send us into recession, but Hurricane Greenspan can. It’s more likely now that the Fed will pause in September from its regular rate increases, but I’m betting that they will not. If they pass, they may make up for it another time, by increasing a later rise or by extending their plan by one more meeting. Oil prices and real estate prices have the Fed spooked, no matter what’s happening with other commodities or other measures of inflation which are generally tame. The Fed feels that it has caused the real estate boom because of its money supply stimulation, and they think they can take it away. Demographic trends are stronger than the Fed is, and that’s the primary reason why real estate is hot. I still think they will overtighten.
As far as gas prices are concerned, though varying greatly, they are still not at inflation-adjusted levels seen during the oil embargoes of the 1970s. That price, about $3.50 before adjustment for inflation, is close at hand. It’s not likely that prices above that will be allowed to be sustained. The 70’s oil embargo price adjusted for inflation and energy productivity is $5.80. We will not get close to that unless another disaster occurs.
It’s important to remember that when Katrina hit, we moved from a demand-caused growth in oil prices to a supply-caused one. They are quite different, as the industry moved from selling everything it could make while it was attempting to make more, to selling what it can while it was incapable of making more. This, again, will take weeks to play out, and that it will take that short amount of time is amazingly good.
Overall, look for near-flat GDP growth for the second half of the year. I do not think it will be negative, but it may be below 1%. Higher gas prices are taking all of the increase in personal income, so people are not benefiting from their increased productivity and higher paychecks. The cost of health care is increasing; our little business here in Rhode Island is getting a 16% increase from United Health Care, and other businesses are getting the same message. Another thing that concerns me is that GDP revision for the second quarter was to the downside. We’ve had this before, and though the 3.3% growth rate is good, most revisions have been up from advance reports. Economic red flags are starting to show up, which would have been the case with or without Katrina.
Remember, I just report what the data are... they're not good, they're not bad, they're just data. I look for patterns in the data. They're not good, they're not bad, they're just patterns.
Commerce has already revised the first six months of 2005 shipments data down by -$2.4 billion. The total revision from 1999 to today is -$8 billion. The monthly revisions they made to 1999 netted out to zero. The shocker is, of course, the size of the revision to 2005 data, which is only for six months. The revisions also affected the growth of the industry compared to last year. Prior reports had us growing. Now we're down -2% compared to last year. Adjusting for inflation sends it to more than -4%.
Needless to say, this is not good news. I have had all of my shipments and profits models updated, and will present and discuss the new data at Print05.
Here's how we now rank compared with other major manufacturing industries in terms of percentage change in shipments versus 2004 (current dollars basis):
Petroleum and coal products +29.1%
Primary metals +12.6%
Computers and electronic products +11.4%
Nonmetallic mineral products +9.5%
Miscellaneous durable goods +9.5%
Furniture and related products +9.4%
Nondurable goods industries +8.9%
All manufacturing industries +7.3%
Plastics and rubber products +7.3%
Food products +6.9%
Chemical products +6.9%
Fabricated metal products +6.8%
Paper products +6.8%
1st half 2005 current GDP growth +6.5%
Electrical equipment, appliances, and components +6.4%
Durable goods industries +6.0%
Wood products +2.3%
Textile products +1.7%
Leather and allied products +0.1%
Beverage and tobacco products -0.2%
Transportation equipment -1.9%
Textile mills -5.5
There's nothing like a measure of things that is crisp and clear and can't be affected by inflation. American Business Media's ad page count is one of them. The report for June can be found here.
Pages are up +1.79%, which means that ad pages are growing at a rate of about half that of the economy. It's important to note that pages are one thing, but run length of those pages is something else. A way to get at the big picture quickly for magazines overall is to look at the postal reports. The third quarter for fiscal 2005 of the postal service data are available here. Year-to-date data start on page 4 of the PDF.
First class pieces are up +0.4% compared to the prior year, but their weight is up +1.5%
Periodicals pieces are up +0.1%, but the change in weight is at 0%, or no change for those who can't handle the concept of nothingness. This implies that circulation is declining: pieces up, weight stays the same, means more different periodicals, perhaps more pages, but not as many being mailed.
The weight of automation presort cards is up by +22%, and pieces is up by +8.4%. Again, the shift to direct mail to drive information access and e-commerce over web sites is becoming much more common.
Pitney Bowes has published a white paper about the future of mailing: