Gasoline Gremlins Relent

The oil crises of the 1970s led to stagflation and, inevitably, recession. But investors nursed hopes that the economy is on firmer footing this time around, as evidenced by the 169,000 nonfarm jobs added last month. The government guesstimate fell 21,000 shy of the consensus forecast, and 73,000 below the upwardly revised July gain. The unemployment rate slipped to 4.9%, a four-year low.

The stricken oil industry breathed a shallow sigh of relief the day after 'Out of Gas' signs cropped up for the first time in at least quarter-century across the Midwest and the East. The price of crude dropped by $1.90 to $67.57 a barrel, while wholesale gasoline futures cooled off 9% after a 33% surge earlier this week. Europe released emergency gasoline and crude reserves, boosting hopes that supplies from overseas will make up the domestic deficit. But President Bush warned of "a problem" with gasoline supplies this weekend. The boss of big refiner Valero Energy (VLO) also predicted shortages.

Eleven percent of the U.S. refining capacity remained offline, with a full recovery not expected for months. "If the Gulf is the heart of the oil industry, we've suffered a heart attack," said the head of the Petroleum Marketing Association. But many consumers deemed gasoline suppliers heartless, based on an early volley of 5,000 gouging complaints.

National Guard troops moved into ravaged New Orleans, reclaiming the flooded city from looters and criminals with guns. Angry refugees and local officials complained bitterly about the pace of disaster relief, and by the morning President Bush was calling it "unacceptable." A chemical plant exploded before dawn, sending a fireball and a smoke plume into the already fouled air.

But the stock market managed a modest gain for the bad-news week, if not the session. The Dow slipped 12 points to 10447, though Caterpillar (CAT) continued to power higher as the extent of heavy moving required in the disaster zone sank in. The Nasdaq backed up 7 to 2141. The S&P 500 dipped almost 4 to 1218.

Transports and the more upscale retailers perked up after a week of selling, on hopes that relaxed shipping and environmental rules will ease the fuel crunch. Energy producers endured profit-taking after climbing to record highs earlier in the week.

There was widespread speculation that the Federal Reserve will slow rate hikes, perhaps foregoing one at its Sept. 20 meeting, to cushion Katrina's blow to the economy. Some of the forecasters who'd expected growth of as much as 5% this fall and 4% throughout the next year now think the economy will be lucky to expand at a 3% rate in the near term.

The credit analysts at Fitch warned that Katrina would prove to be the costliest U.S. disaster ever, surpassing the $20 billion price tags for Hurricane Andrew and the Sept. 11 attacks. Risk Management Solutions estimated direct economic losses from Katrina at $100 billion. Cloud banks off West Africa and bath-water temperatures in the Gulf of Mexico suggested that hurricane won't be the year's last.

Boeing (BA) shares dropped 2.5% after 18,400 machinists went on strike, idling the assembly of commercial airplanes. Company officials have warned that the business may not easily recover from an extended work stoppage. But the machinists believe they have leverage to defend retiree health benefits and force higher wage increases, at a time when their employer is posting record profits.

Northwest Air's (NWAC) pilots proved more accommodating, offering to re-open talks on fresh concessions even as the airline's machinists remain on an apparently futile strike. The carrier warned that soaring fuel costs will help it run up a loss of up to $400 million in the latest quarter, elevating bankruptcy risks. The stock slid 9%.

In contrast, Albertsons (ABS) shares ripened 11% after the supermarket chain hired an investment adviser to consider "strategic alternatives." Whatever those are, the end result is often a sale.

Bonds slipped, with the short-end of the curve the worse for wear as traders decided that a moratorium on rate hikes is no sure thing. The 10-year Treasury yield ticked up to 4.04%. The dollar continued to sink. Japan was not aflame with oil worries, as Tokyo's Nikkei claimed a new four-year high.