Each depositor insured to at least $250,000 per insured bank

U.S. labor market growth weakened noticeably during September and October, dragged down by job losses in the Gulf Coast region. During both months, nonfarm payrolls were essentially unchanged, but the unemployment rate remained relatively steady around 5 percent, near its lowest level since 2001. As of early December, the Bureau of Labor Statistics estimated that 562,000 initial jobless claims had been filed as a result of Hurricanes Katrina and Rita (see Chart 2). These claims were concentrated primarily in Louisiana and Mississippi, and to a lesser extent in Alabama. However, nationwide initial claims have since fallen back to near pre-Katrina levels. Furthermore, the labor market rebounded in November with nonfarm payrolls expanding by 215,000, their largest gain in four months.

During September, consumer confidence fell to its lowest level in two years and remained subdued during October before recovering slightly in November (see Chart 3). High energy prices, coupled with ongoing geopolitical concerns and uncertainties about the economic impact of the hurricanes, weighed on the consumer’s evaluation of both current and future conditions. For example, a CNN/USA Today/Gallup poll taken in mid-September (about two weeks after Hurricane Katrina’s landfall) indicated that four out of five Americans were concerned that Katrina would negatively impact their finances. A CBS/New York Times poll taken around the same time showed that 73 percent expected their taxes to increase as a result of the storm.

Real personal disposable incomes declined during August, driven mostly by a significant drop in business owners’ income resulting from Katrina. Total private industry wages also came under pressure but still managed to grow during August and September. One factor that helped support private industry wages was the decision of some companies with operations in the Gulf Coast region to either keep employees on their payrolls (even if they were unable to work) or to relocate them to undamaged worksites.

Despite continued growth in incomes and the payments associated with federal disaster relief, inflation-adjusted U.S. consumer spending declined during both August and September (see Chart 4).² Much of this decline was attributable to a sharp drop in auto sales that began before Katrina, as well as a sluggish back-to-school shopping season (see Chart 5). While September’s dip in spending can be explained by the adverse effects of the hurricanes on employment and consumer confidence, more recent indicators point to a rebound in spending. Retailers reported that, nationwide, same-store sales increased 4.4 percent in October and 3.5 percent in November, according to the International Council of Shopping Centers. Early holiday sales were modest, propped up by discounters like Wal-Mart that offered a series of price cuts for “Black Friday,” the day after Thanksgiving. As a result, retail analysts who were initially concerned that the holiday season could be much weaker than initially forecast, now expect that the discounts and price wars may help perk up holiday spending.

As of early fall, nationwide measures of household loan performance remained relatively strong. However, Hurricane Katrina hit hardest in an area of the nation that historically has lagged the nation in terms of poverty rates and credit performance. Accordingly, many households in the region were somewhat vulnerable to financial shocks. For example, one-fifth of Louisianans were already living below the poverty line before Katrina. The average credit score in New Orleans was 633 during second quarter 2005 and the 60-day delinquency rate was 5.4 percent.³ These figures compared with an average national credit score of 662 and a delinquency rate of 4.2 percent. Given the relative financial weakness of many Gulf Coast households at the time of the hurricanes, any resulting consumer credit deterioration could be more pronounced than if the storms had hit a less vulnerable subset of the population. This risk may be mitigated to the extent that these borrowers tended to hold smaller average loan balances than borrowers in most other regions.

Louisiana officials report that they are expecting an increase in the number of personal bankruptcies filed in the state.⁴ Historical research shows that over the past 25 years, states where major hurricanes made landfall have seen bankruptcy filings subsequently increase 50 percent faster than filings in states not affected by the storms (see Chart 6). The largest deterioration is typically seen two to three years after the hurricanes hit, suggesting that Louisiana and Mississippi may continue to experience increased credit quality problems during the next few years.

Susan Burhouse, Financial Economist
Nathan H. Powell, Financial Economist