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Economists Try to Size Up the Storms

By David Wyss The post-Katrina economic results are beginning to come in, but economists are in the dark, along with the average energy consumer. Generally, the data suggest less damage to the economy than expected, but the sharp drop in the Institute for Supply Management nonmanufacturing index and in hospitality and retail employment indicate damage was significant, at least in the service sector.

Payroll employment fell 35,000 in September, much less than expected, and the unemployment rate rose to 5.1%, a slight uptick from 4.9% in August. However, the payroll and unemployment-rate numbers are nearly worthless because of the data-collection problems created by Hurricane Katrina.

JUST GUESSING. Both the payroll and unemployment data are collected by surveys -- of businesses and households, respectively. The former occupants of New Orleans weren't responding to surveys in the week of Sept. 12, when the Bureau of Labor Statistics was taking its readings.

The BLS imputed answers based on responses they did get. But those data were almost certainly biased in favor of more jobs as opposed to fewer, since only companies that survived were likely to respond. The BLS understands this problem and made efforts to correct for it, but like everyone else, it is just guessing at the impact of Katrina.

I think the payroll survey may be distorted more than the household because there were rough evacuee counts. It is thus encouraging that the 17,000 drop in household employment is mirrored by the 35,000 drop in payrolls.

BOEING STRIKE. Since payrolls have been rising about 200,000 a month, the figures suggest that the immediate impact of Katrina was the loss of 235,000 jobs, about 100,000 less than most estimates. But payrolls by definition measure whether the worker was on the payroll in the pay period including Sept. 12.

Many workers probably were still being paid despite the fact that their place of employment was closed. We expect to see further impact in October, both because more Katrina victims will drop off payrolls and because Rita destroyed additional jobs.

The information in the report that are meaningful are generally encouraging. Manufacturing jobs fell 27,000, in rough line with expectations. Non-auto transportation accounted for the entire drop in manufacturing jobs, implying that the Boeing (BA) strike, not Katrina, was responsible.

ON THE PAYROLL. Manufacturing was less affected both because there aren't a lot of such jobs in New Orleans and because most such companies survived the disaster and are thus still reporting. Most refinery workers remained on the payroll and are working on repairs. Retail and leisure and hospitality, the two sectors most affected by Katrina, fell 88,000 and 80,000, respectively, which seems reasonable.

The 36,500 rise in service jobs reflects in large part temporary workers hired to staff relief centers and to help in cleanup. The 23,000 gain in construction jobs may also include some early hiring for repair work -- although more in Mississippi and Alabama than in Louisiana.

The upward revision of 77,000 jobs overall in the July and August data is also meaningful, since it shows that going into the hurricanes, there was more momentum than previously thought. August now shows a 191,000 rise, and July, 277,000.

NOT SEEKING WORK -- YET. The rise for the 12 months ending in August is now reported as 2,326,000, compared with 2,161,000 for the 12 months ending in September. After the September and expected October damage, we expect the monthly trend to revert to 200,000.

The small rise in the unemployment rate as reported by the household survey isn't surprising. Most affected persons probably reported that they had a job but were not at work, and an individual has to be actively seeking employment to be counted as unemployed.

The unemployment rate among African Americans actually dropped to 9.4%, from 9.6% -- a surprise given the demographics of New Orleans. The participation rate fell to 64.2%, from 64.6%, which probably reflects that evacuees were too busy hunting for food and shelter to seek work. We expect the unemployment rate to rise again in October, but then drop.

TO THE MALL. The September drop in consumer confidence does not appear to have kept Americans from shopping malls. According to the International Council of Shopping Centers, sales at major chain stores open for at least a year rose 4% from a year earlier in September, an acceleration from the 2.4% reported a year earlier.

The results showed a sharp split, however: Both discounters and high-end stores doing well but apparel and midrange department stores soft. Wal-Mart (WMT) and Costco (COST) benefited from gasoline sales, but Target (TGT) was also up strongly.

The midrange department and apparel stores, such as J.C. Penney (JCP), Kohl's (KSS), Gap (GPS), and The Limited (LTF), were weak or down.

The Manufacturing Report on Business from the Institute for Supply Management, a survey of purchasing managers, jumped to 59.4 in September, from 53.6 in August, suggesting improved confidence after Katrina. The index has been above 50 for 28 consecutive months, an encouraging sign for growth.

DIRECT DAMAGE. The similar Nonmanufacturing Report from the ISM, in contrast, dropped sharply to 53.3, from 65 in August. The positive report for manufacturing was based largely on stronger orders, while the weakness in the nonmanufacturing report came from lower orders. Manufacturers may also be looking toward the increase in rebuilding demand, whereas the service sector is seeing the direct damage to the industry.

Although data problems mean we may never know the exact impact of the hurricanes, so far it appears the economy is surviving with only minor damage -- at least if your house isn't underwater. Americans are responding to disaster in their usual manner -- by going shopping. And the government is spending money even faster than shoppers, which should bring the economy back quickly once rebuilding gets under way.

Wyss is chief economist for Standard & Poor's

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