Software and Steel

S&P believes that changes in the U.S. economy over the past quarter century will speed the recovery from Katrina

By Joseph Lisanti

The economic data released over the past few days have shown a fairly resilient economy with not much inflation. Core consumer and producer prices (excluding volatile food and energy costs) posted negligible gains. Of course, all of these numbers were collected before Hurricane Katrina.

Retail sales slumped 2.1% in August. But exclude auto sales (down 12% as the "employee discount" programs left little in the way of 2005 models to sell), and retail was up 1%. On the other hand, the increased cost of gasoline accounted for half the gain - and that's before Katrina caused prices at the pump to surge.

One of the first post-hurricane reports on the economy was from the Labor Department, which indicated that Katrina caused 68,000 of the 71,000 new unemployment claims. While the human cost of this tragedy continues to shock Americans, we still believe that the effects on U.S. economic activity will be limited.

Yes, energy will cost more. The government's Energy Information Administration estimates that petroleum, natural gas, and electricity expenditures now represent 8.7% of annual gross domestic product. Although that's up a bit, it remains far below the 14% seen in 1981.

Why is that? Much of the economic growth over the past few decades has been in service businesses. For example, computer software and data services were relatively small industries a quarter century ago. There were no industry groups for them in the S&P 500 in 1981. The closest group was electronics (computers and semiconductors), which contained all of five companies. But in 1981, steel companies in the "500" numbered eight.

Today, information technology as a whole constitutes more than 15% of the value of the index. Steel is 0.15%. The top four U.S. software and services companies alone had revenues of $124.4 billion in 2004. The four biggest American steel makers posted sales of $35.5 billion in the same year. And it takes a lot less energy to produce software than steel.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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