A strong early dive in oil prices helped drive a 250 point surge in the Dow on Tuesday (September 2). Oil dropped sharply to a low of $105.46 per barrel early in the day based on reports that the Gulf Cost oil refineries were largely spared as Hurricane Gustav swept through the southeast part of the US. The wild swings in oil and stocks were indicative of the treacherous winds and rain dropped by Gustav the Coast.

The actual effects of Gustav were generally less than some had feared, although there were many areas that experienced significant damage in Louisiana and nearby states. Despite the early enthusiasm, oil prices quickly rebounded to settle near $110 per barrel by the day’s close. The New York trade closed at $109.71 per barrel. Similarly stocks surged early in the trading day, but closed slightly down by day’s end, with the Dow dropping 26 points.

Some analysts were quick to remind Americans that oil could quickly rebound to record prices of mid-July, just as easily as they have fallen off. However, to many observers, today’s oil speculation seems to be more the result of emotional reactions in opposite directions. Early drops in oil were driven by excitement over the lack of extreme damage from the Hurricane, which some had anticipated would be as deadly and damaging as Hurricane Katrina. The sudden reversal did not take long to develop either, after the enthusiasm for the good news wore off.

In other economic news, data showed a contraction in manufacturing and construction. The August Institute for Supply Management index registered a reading of 49.9, compared with the reading of 50 in July. Although barely below it, the 49.9 meets the criteria for manufacturing contraction, which is any mark that falls below 50.

Manufacturing activity is often connected to other parts of the distribution channel as contracting manufacturing suggests less retail and consumer demand for products. The dip in manufacturing calls into question the potential that retail have likely stalled a bit after Americans spent their early summer tax rebate checks. Second quarter retail data and reports have supported this notion, which does not bode well for the economy. However, the 3.3 per cent growth in second quarter GDP was much stronger than most experts had expected.

With the summer driving season winding down, Americans now must shift their focus to managing heating costs during a potentially harsh winter to come. The four-season regions of the US are likely to see some hefty home and business heating bills during the harshest parts of the winter. While last year was especially wintry in terms of snow and precipitation, colder temperatures did not come until late fall, which helped ease the cost of home heating.

Inflation concerns were stemmed a bit by further data today. The steady dollar and a drop in inflation would be welcomed news to Americans. If oil can continue its downward trend and potentially fall below $100 per barrel in the coming weeks, natural gas prices would likely follow. This would definitely be a good sign as October and November draw near.

Market Recap

US financial markets were closed Monday for the Labor Day holiday. Stocks traded relatively flat on Tuesday after an early 250 point surge in the Dow. The Dow lost 26 points, while the NASDAQ and S&P were off by 18 and 5 points, respectively. Manufacturing and construction both shrunk in August. Oil prices retreated during Tuesday’s trading.

Neil Kokemuller
Tuesday, September 2, 2008
11:57 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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