How Soft A Patch?

Richard DeKaser After motoring along at a stellar pace since the middle of last year, the economy slowed measurably in recent months. Fed Chairman Greenspan dubbed this moment a “soft patch” – a descriptor last used to depict the weakness preceding last year’s war in Iraq when uncertainty crimped hiring and investing. As with that earlier episode, however, this version should prove just as temporary, with stronger growth resuming as temporary impediments are ultimately reversed.

First, lets put this soft patch in perspective. One way is by looking at trends in GDP, or total output of goods and services. After rising 5% during the year ending this first quarter, the second quarter tally was a less exuberant 3.3%, and the conventional wisdom is for a third quarter reading around 4%. Hence, growth has slowed from a 5% pace to roughly a 3.5% pace since March. While that’s significant, it’s hardly debilitating – especially compared to a 10-year average growth rate of 3.3%.

Another perspective comes from the index of coincident economic indicators, the measure used to identify business cycle recessions and expansions. After peaking out at a growth rate of 3.7% in the four-month period through May, it dawdled at a 1.8% pace over the next four months. Compared to its 2.9% growth rate during the expansion of the 1990s, however, this isn’t much to complain about. And it certainly looks favorable compared to the pre-Iraq soft patch, when it ground to a halt.

To be sure, high oil prices continue to play a major role in this recent economic slow-down, but that should reverse course as more supply finds its way to market. In fact, that was happening until recently, when an unpredictable hurricane trio wreaked havoc with a quarter of America’s oil output during August and September. America, it should be noted, is the world’s third largest oil producer, after Saudi Arabia and Russia, and U.S. Gulf Coast operations alone are on a par with the entire output of Syria or Yemen. Additionally, according to the Energy Department’s latest Weekly Petroleum Status Report, “it appears that Hurricane Ivan dramatically reduced imports from Venezuela,” which happens to be the fourth largest exporter of oil to the United States. So this latest spike in oil prices, to nearly $50 per barrel, should be viewed as a temporary setback on the road to better supply/demand fundamentals, rather than a lasting trun for the worse.

Still, the combined impacts of Charley, Ivan and Frances – three of the five most damaging hurricanes recorded – will muddy the waters as economists try to get a clear read on the economy in the weeks immediately ahead. Aside from their damaging effect on oil markets, the three are likely to leave a mark on other aspects of the economy as well.

Characteristically, hurricanes reduce economic activity during the month they strike, as hiring, retail spending and construction activity all slow down. But the immediate aftermath typically rebounds sharply, as the clean-up, rebuilding and catching-up with suspended sales resume. Practically speaking, this means readings on the economy are likely to be murky, and less perky, until October’s results, with will only start reaching the media in November.

In the meantime, try to be patient, recognize that the soft patch is less gloomy than generally reported, and regard hurricane-related impacts for what they are – momentary disruptions.

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