Fears of Economic Slowdown Grow

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Experts say further fuel price hikes could ignite inflation. Greenspan, under pressure to delay raising interest rates, meets with Bush.

Los Angeles Times

WASHINGTON, D.C. — Concerns grew Thursday that Hurricane Katrina could have wide-reaching effects on the nation’s economy, causing record gasoline prices to surge even higher, key agricultural crops to rot in Midwestern fields and warehouses, and some of the nation’s troubled airlines to collapse.

As estimates of the economic damage mounted, Federal Reserve Chairman Alan Greenspan came under increasing pressure to scrap or delay further Fed interest rate increases. In a hastily arranged White House meeting, President Bush summoned the Fed chief to discuss what could be done to lessen the hurricane’s economic toll.

Details of the meeting were not disclosed, but many experts predicted that Greenspan would work to avoid a possible economic slowdown.

Experts warned that gasoline prices ‘ driven higher because of storm-related damage to the Gulf Coast’s energy infrastructure ‘ were the greatest concern and might be approaching levels that would soon ripple through the economy.

If that happens, prices of basic items could soar, pushing up inflation. The Gulf Coast accounts for about 20% of the nation’s oil and natural gas supplies.

High gasoline costs ‘ and accusations of gouging amid prices as high as $5 a gallon ‘ also appeared to be fueling a consumer backlash. But the Bush administration took no immediate steps Thursday to halt the run-up in pump prices.

After a lunch with Greenspan, Bush warned of temporary gas shortages in the coming weeks and called on Americans to conserve energy.

“Don’t buy gas if you don’t need it,” the president said at a White House appearance.
With eight major refineries incapacitated, Bush said, “It’s going to be hard to get gasoline to some markets.”

He did not elaborate, but oil industry experts said the Midwest, the South and perhaps the Atlantic seaboard would probably experience shortages.

Some economists said Katrina’s toll could be more far-reaching than the Sept. 11 terrorist attacks, for example, because of its potential effects on trade and key sectors of the U.S. economy.

The U.S. is the world’s biggest agricultural exporter. Most crop exports float down the Mississippi River on barges and then are transferred to ships at one of the Gulf Coast ports.

Massive damage to the region’s ports would idle the barges that transport oil, sugar and grain along the Mississippi River.

That would mean that farmers in the South and Midwest who depend on the waterway to ship their goods to foreign markets would lose a cheap shipping route. On Thursday, many fully loaded barges drifted with nowhere to go.

Retailers who use Gulf Coast ports to receive their imports also have to scramble to find alternative docks.

Although they generally aren’t predicting a recession soon, many economists have lowered their estimates for economic growth, in part because of Katrina. Experts who previously predicted that growth in the current quarter would exceed an annualized rate of 4% now expect the pace to fall below 3.5%. Others think growth could fall below 3%. The economy expanded by 3.3% in the April-June quarter.

Federal Reserve policymakers have raised their benchmark short-term rate 10 times, by a total of 2.5 percentage points, since June 2004 in an effort to control inflation.

Until recently, most analysts had thought the Fed would boost its key rate an additional three-quarters of a point before stopping. But now many traders are betting that there will be only one more quarter-point increase ‘ from 3.5% to 3.75% ‘ in the so-called federal funds rate, the interest banks charge each other for very short-term loans. The central bank’s next rate-setting meeting is Sept. 20.

“What Katrina has done is shift the economic focus from inflation to growth,” said David M. Jones, a Denver economic consultant and veteran Fed watcher.

“I think what you’ll see is the Fed pausing at its next meeting, citing special circumstances,” he said.

The crisis has hit the airlines particularly hard, with a surge in jet fuel prices and the loss of passenger traffic in the Gulf Coast region. Carriers such as Delta Air Lines and Northwest Airlines already were perilously close to filing for bankruptcy protection, and Northwest said Thursday that it now had even less time to slash costs if it hoped to avoid a filing.

Concerned about a possible economic slowdown triggered by high energy costs, investors have driven down bond interest rates this week. That also represents an immense bet that the Federal Reserve’s rate-raising days are coming to a swift close as a result of the hurricane.

Greenspan had no comment after meeting with Bush. The central bank, however, joined other federal regulatory agencies late Thursday in issuing a plea that banks in the affected region help people get back on their financial feet by doing such things as waiving ATM fees, increasing the amount allowed for daily cash withdrawals and permitting people to get at their savings without having to pay penalties.

Although Greenspan is much praised as an economic crisis manager, his ability to cope with the current threat to growth may be much more limited than in such upheavals as the Mexican peso crisis, the Asian financial panic and the aftermath of the 2001 terrorist attacks.

That’s because in each of these previous events, the Fed chairman’s primary focus was on the health of the nation’s financial markets, something he could readily affect by announcing the Fed’s readiness to open the spigot on credit.

By contrast, the key problem now is the physical condition of oil and gas drilling platforms in the Gulf of Mexico, as well as refineries and pipelines in Louisiana and Mississippi ‘ something that no amount of money can immediately improve.

Analysts said again Thursday that it could be weeks before energy industry executives assessed the condition of their facilities. But these analysts warned that if the damage was substantial, it could have significant and long-lasting repercussions.

The biggest danger is that Katrina has seriously damaged Gulf Coast refineries, which account for 10% of U.S. refining capacity. Without these refineries, the oil being drawn from government stockpiles can’t be turned into useable products for the areas they serve.

“Particularly the East Coast could soon be teetering on the edge of shortage,” said Daniel Yergin, chairman of Cambridge Energy Research Associates.

But the biggest concern ‘ among consumers and some economists ‘ was the effect of rising gasoline prices.

Rebecca Ramirez, 23, of Atwater Village, was already heeding Bush’s request for conservation ‘ out of necessity. “Before, going places, I wouldn’t think about it. Now I have to think twice,” she said while paying $30 to fill the tank of her Acura at a Silver Lake station.

Ramirez said she was working as a waitress mainly to pay for the gasoline she needed while hunting for another job.

“I look at the people in New Orleans and I feel bad, but it does hurt my pocketbook and my savings,” she said.

Surging pump prices that exceeded $3 a gallon from California to Maine sparked accusations of industry profiteering.

Public Citizen, a Washington-based consumer advocacy group, urged Bush and Congress to impose price controls on oil and gas until the gulf crisis eases.

Another group, the Santa Monica-based Foundation for Taxpayer and Consumer Rights, called on Bush “to warn oil companies against profiteering in the wake of Hurricane Katrina.”

The rise in gas prices is becoming increasingly worrisome for many Americans, and they want the president and Congress to make it their top domestic priority, according to a new Associated Press-Ipsos poll. It showed 24% of those surveyed listed pump prices as a top concern, second only to the war in Iraq.

What troubles some Californians is that prices in the state also have jumped this week even though 90% of the state’s gasoline is made at refineries within California, because the state has stringent air-quality standards for fuel.

The remaining 10% comes from a variety of regions, including Washington state, Canada, Germany, Finland and, to a smaller extent, the Gulf Coast, according to the California Energy Commission.

But “some of those shipments bound for California have been diverted to the East Coast” this week because of Gulf Coast-related shortages, agency spokesman Rob Schlichting said.

That has led to tighter supplies in California and is helping lift prices, he said. However, “there are no supply shortages we know of in California,” he said.

California prices might be rising partly because consumers, fearful of shortages amid the Gulf Coast crisis, have been topping off their tanks ahead of the Labor Day weekend, said David Ramberg, an energy economist at Economic Insight Inc. in Portland, Ore.

“I wonder how many people in California are worried that gas is going to get more expensive, so they’re buying more than they need,” he said.

There was some promising news. Valero Energy Corp. said power was restored to its big St. Charles, La., refinery, enabling employees to start repairs. Two of the major pipelines that distribute oil and gasoline from the gulf also were back up, but running well below their normal capacity.

The White House, in another step aimed at easing the crisis, waived rules requiring that only U.S.-flagged ships could carry oil between U.S. ports so that foreign vessels could help get products to refiners faster.

Bush also has temporarily lifted clean-air rules for gasoline and lent crude oil from the U.S. Strategic Petroleum Reserve to companies such as Exxon Mobil Corp. and Valero, whose Gulf Coast refineries are low on crude.

Gasoline prices had been rising in California and nationwide because of tight supplies even before the hurricane hit. Hawaii had taken the unusual step of imposing caps on its gas prices.

Bernard Picchi, senior managing director at Foresight Research Solutions, said the surge in gas prices was causing “a huge drain in people’s disposable incomes,” and could soon become “exactly the kind of wake-up call” that would spark widespread conservation.
Gosselin reported from Washington, Peltz from Los Angeles. Times staff writers Edwin Chen and Richard Simon in Washington, Claire Hoffman in Los Angeles and special correspondent Dana Calvo in Houston contributed to this report.

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