by Calculated Risk on 8/31/2005 06:12:00 PM

Even before the devastation of hurricane Katrina, the US economy was apparently headed for a significant slowdown and possible recession. According to a survey of CFOs completed on August 28th (before Katrina): Housing, Fuel Are Top CFO Concerns

In the four years of the survey, this is the first time that CFOs with growing pessimism outnumbered CFOs with growing optimism. Indeed, the level of optimism is down sharply from last quarter's 40 percent and is strikingly lower than last year's 72 percent.

"This is the greatest increase in pessimism that we have seen," says Don Durfee, research editor of CFO magazine. "We’ve found that this optimism index predicts future economic growth quite well. In a situation like this, where the growth in pessimism outweighs the growth in optimism, we expect to see a slowdown in economic growth."

Emphasis added. And the most recent numbers have not looked good:

Macroblog: Not The Most Bullish Day For Economic News

The Big Picture: PMI, GDP stink up the joint

And here is how Briefing.com described the Chicago PMI report (with chart):

• An unbelievable plunge to 49.2 in August Chicago PMI index (-14.3 pts).
  
  Key Factors
  
• Record sized plunge leaves index in a contractionary sub 50 level -- the first since April '03 after reaching a 17 yr high in March.
• New orders (30% weight) plunged an astounding 23 points to 46.5 -- presumably off the highs in oil prices.
• Production fell to 56.2 from a nose bleed 70.5 in July as it followed orders.
• Employment fell in line to 51.7, March stood at a high 66.
• Prices paid rose to just 62.9 and doesn't reflect the pricing fear we are assuming caused the orders plunge.

So Katrina impacted an already fragile US economy. Dr. Hamilton notes this while discussing the energy related economic impact of Katrina: Day 2:

... this event did not arrive out of the blue. Instead, it came in an environment in which there was already considerable anxiety about gas prices and sound basis for worrying about a possible recession even if Katrina had done no harm.

Could this be enough to tip the whole economic cart over? I'm not certain that it will. But it would seem foolish to deny the very real possibility that it could.

And Kash makes a similar observation - "I’ve been a bit worried about which way animal spirits were heading in the US" before Katrina struck - he writes on Katrina and Psychology over on Angry Bear:

Now add Katrina. ... I think that the current situation contains the seeds for such a shift in sentiment. My personal odds for a recession in 2006 have just gone up, thanks to Katrina.

UPDATE: Dr. Polley adds: Katrina and the probability of recession

"I am reluctant to speculate too much too soon about a recession. It's just too early. But all in all, the economics corner of the blogosphere has been (as evidenced by the links here) very reasoned in its assessment of the situation. My take is closest to Hamilton's. It would indeed be foolish to underestimate the possibility that this could be the straw that breaks the camel's back.
...
Of course, that doesn't mean a recession is inevitable. ... I think it is safe to say, however, that this is a very critical moment for the economy. It could swing either way. If we pass this hurdle, I think it bodes well for the future of the recovery."

OTOH, the Ten Year bond has rallied and the yield has dropped from 4.4% to just under 4.1% over the last few weeks. This will probably lead to lower mortgage rates and could possibly boost equity extraction and support the housing market. Tomorrow the OFHEO House Price Index will be released and I believe it will show stunning widespread gains in house prices and that might help with confidence. But I think the housing boom is almost over, even with slightly lower mortgage rates.