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Saturday, October 1, 2005 - Page updated at 12:00 AM

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Economy wobbles in wake of Katrina

The Washington Post

WASHINGTON — Consumer spending fell in August at the steepest rate since the Sept. 11 attacks as Hurricane Katrina slashed Americans' incomes, fanned inflation and caused $170 billion in losses from property damage, the government reported yesterday in its first tally of the storm's economic effects.

The report came one day after the Labor Department said 279,000 Americans had filed new claims for unemployment-insurance benefits because of Katrina, which slammed into the Gulf Coast on Aug. 29, wrecking homes and businesses, driving up energy prices and forcing a mass evacuation.

With savings low, interest rates rising and consumer confidence plunging, analysts are widely forecasting U.S. economic growth to slow through the end of the year, as households and businesses trim nonenergy spending.

"It's clear that the economic impacts from the hurricanes will stretch well beyond the Gulf Coast region to all corners of the nation and beyond," said Scott Anderson, senior economist with Wells Fargo Economics. "Of great concern for the economy is the mood of the U.S. consumer."

Damage caused by Hurricane Rita occurred too recently to be reflected in the report.

Katrina pushed gasoline, natural-gas and heating-oil prices higher at a time when many shoppers may be tapped out after pushing home and auto sales to record levels during the summer.

Americans spent more than their after-tax incomes in June, July and August, the Commerce Department reported, showing that personal saving was negative for three consecutive months — the first time that has happened since the department started collecting the data in 1959.

Consumers were able to spend more than their take-home pay all summer by dipping into savings, taking on more debt or selling assets that have grown in value, particularly rapidly appreciating homes.

Federal Reserve Chairman Alan Greenspan, in a research paper released Tuesday, estimated that consumers gained an extra $600 billion in cash to spend last year by selling or refinancing their homes, or through home-equity loans — equivalent to 7 percent of after-tax personal income. Mortgage rates remain low, but have moved up in recent weeks as rising energy prices have fueled fears of higher inflation, and as the Fed has indicated it plans to keep raising short-term interest rates to prevent inflation from taking off.

Consumer prices jumped 0.5 percent in August, according to the Commerce Department's inflation measure. Inflation rose to 3 percent in the 12 months that ended in August, up from 2.6 percent in the year ended in July.

Consumer spending fell 1 percent in August, after adjusting for inflation, partly because of a big fall in auto sales after the boom in July, when the nation's top three automakers offered employee discounts to all shoppers. Still, it was the biggest monthly spending drop since a similar decline in September 2001.

Personal income — which includes wages, salaries, rents, interest and other sources — fell 0.1 percent in August; it would have risen 0.2 percent if not for the hurricane, according to the Commerce Department.

After adjusting for inflation and taxes, personal income fell 0.5 percent in August.

The hurricane hit three days before the end of August, but the disruption began several days earlier as warnings of the approaching storm prompted businesses to close, refineries and oil rigs to shut down and residents to flee. Oil and gasoline production in the region remains below its usual level.

Copyright © 2005 The Seattle Times Company

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