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Now Katrina is battering economy

Soaring energy prices may spur a consumer cutback

WASHINGTON — Hurricane Katrina is starting to eat into the economy, leading to concern that consumers will lose confidence and curtail spending.

The government reported Wednesday that retail sales plummeted last month, even before the storm hit, as high gasoline prices jolted consumers. Also, industrial output was nearly flat, reflecting widespread shutdowns of oil platforms, refineries and chemical plants along the battered Gulf Coast.

Analysts said they still believed Katrina will amount only to a temporary blow to the economy and that stronger growth will follow as rebuilding gets under way.

But they said the impact could turn out more severe if soaring energy prices cause consumers to cut back very sharply on spending elsewhere.

Industrial output posted a 0.1 percent gain in August. It would have been 0.4 percent, the Federal Reserve reported, if not for the shutdown of much energy and chemical production along the Gulf Coast at the end of August before Katrina struck.

Economists predicted the fallout would continue as the energy industry struggles to regain its footing.

"The industrial production numbers in the next two months will look pretty awful as the full impact on the hurricane-related shutdowns show up in the data," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., consulting firm.

Even before Katrina, the economy was weakening, according to the report Wednesday that showed retail sales plunged by 2.1 percent in August. That was the biggest since a 2.9 percent decline since November 2001, right after the attacks of Sept. 11, 2001.

The August decline was twice the size economists had forecast.

The weakness came from a 12 percent drop in auto sales. Demand slackened after two strong months in which employee discounts offered to the public spurred sales.

Excluding autos, retail sales rose by 1 percent — half of which came from a huge rise in gasoline prices. Analysts said the retail sales data was evidence that gasoline above $3 per gallon was having an impact on consumer demand in other areas such as clothing.

Sales at departments rose a sluggish 0.3 percent. Demand at clothing stores was flat in August following a 0.9 percent decline in July.

Ian Shepherdson, chief economist at High Frequency Economics, a consulting firm in Valhalla, N.Y., said he did not expect a quick rebound in retail sales. He said he believed high energy costs would continue to depress consumer spending for several more months.

The Congressional Budget Office reported last week that Katrina, the worst natural disaster to hit the United States, could trim economic growth by a full percentage point in the second half of the year.

Private economists speak of a temporary slowdown and a solid rebound in 2006 as rebuilding efforts get under way in the Gulf Coast states. But analysts say this scenario could prove too optimistic if higher energy costs and increased layoffs due to the hurricane cause consumer confidence to falter.

In a worrisome sign, the International Council of Shopping Centers reported Tuesday that sales at chain stores fell by 0.2 percent for the first full week of September.

The biggest increase in spending in August occurred at service stations. The 4.4 percent increase reflected pump prices that have soared past $3 per gallon in many places.

Without the jump in spending at gas stations, retail sales would have fallen by 2.8 percent last month as demand faltered in many sectors, the government estimated.

Furniture stores, reflecting the continued boom in the housing sector, posted a 0.9 percent increase in August, however, while sales at electronics and appliance stores rose by 0.3 percent.