The (shorterm) effects of a hurricane




After the two devastating hurricanes Rita and Katrina the American economy has taken a knock in terms of diminishing consumer confidence and spending ... This is not good for the world economy.

The primary reason for the drop in consumer confidence is the surging oil prices brought about by the supply side effects of the two hurricanes which elevated the prices to +3 $ per gallon - see article from ABCNews here

"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."

In its own right, this is a bad thing but as the oil prices begin to materialize into core inflation it looks particularly grim; slowing demand and rising inflation spells out stagflation - see article from Channelnewsasia here.

"The decline was driven by pessimistic perceptions of the general economic situation -- both past and future -- even after the Bank of England lowered interest rates for the first time in two years in August."

In an environment where central bankers pursue their inflation targets through twisting the interest rate wheel consumer confidence has to be resilient to compensate for the lacking return on investment - they need to use their savings. However, the huge mortgages taken out against houses as assets are very sensitive towards higher interest rates which can essentially smash consumer confidence down even further.

Article from News

"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."  

Can we really depend on American consumers anymore?