What Hath Sandy Wrought?

 | Nov 16, 2012 | 3:30 PM EST  | Comments
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With data out Thursday and Friday morning, we now have some idea of how Hurricane Sandy has affected industrial production and manufacturing.

The Federal Reserve, which compiles the Industrial Production report, says that the storm reduced manufacturing output in November by 0.9%. The manufacturing component would have been unchanged from October had it not been for the storm. Total industrial production, which includes not just manufacturing but mining (including energy drilling) and utilities, declined 0.4% in October after increasing 0.2% in September.

The largest estimated storm-related effects included reductions in the output of utilities, chemicals, food, transportation equipment, and computers and electronic products. The output of utilities edged down 0.1% in October, and production at mines advanced 1.5%. Industrial production is still 3.4% less than its pre-recession 2007 average, but total industrial production in October was 1.7% above year-earlier level.

Capacity utilization for total industry decreased 0.4 percentage point to 77.8%, a rate 2.5 percentage points below its long-run average (1972-2011). In other words, there's a ways to go before output strains the ability to produce more, which means supply constraints from this source are not yet sufficient to spark inflation.

Look at data released Thursday by the two Federal Reserve district banks in the regions most affected by the storm: the New York Fed's Empire State Manufacturing Survey and the Philadelphia Fed's Business Outlook Survey. In the Empire State survey, we see in a series of supplementary questions that firms were asked about the extent of Sandy's effect their businesses. Among firms based in upstate New York, only 21% reported any loss of activity due to the storm, usually for no more than one day. But 100% of firms in the New York City area reported some reduction in activity. This was mostly related to a loss of power and loss of communications, reported as major factors by more than 70% of downstate businesses.

As a result, the headline Empire State survey declined at a modest pace, with a negative reading of -5.22, though, surprisingly, this represented an uptick from the previous month's print of -6.16. New orders were a positive 3.08, up from -8.97 in October. But what's troubling is that the employment metric dropped sharply to -14.61 from -1.08, which may reflect caution ahead of uncertainty about the fiscal cliff amid political gridlock.

Meanwhile, the Philly Fed survey also showed contraction in activity from the storm. Across all firms in the district, the average lost production was 2.2 days, with firms shut down an average of 1.3 days. Nearly a third of all firms reported that activity was reduced by three days or more, while just 13% reported no reduced activity.

While difficult to tease out the effects of the storm in the component indices, the survey's headline index decreased 16 points to a reading of ‐10.7. This drop followed a single positive reading in October that was preceded by five negative monthly readings. Nearly 32% of firms reported declines in activity this month, while 21% reported increases. New orders declined 4 points from last month and remains in negative territory, now at -4.6.

Like manufacturers in the New York Fed district, manufacturers in the Philly Fed district are also cutting staff. The current employment index, at ‐6.8, was slightly improved from its -10.7 October reading, but it has remained negative for five consecutive months. The percentage of firms reporting decreases in employment (20%) exceeded the percentage reporting increases (13%). Firms also indicated fewer hours worked: The average workweek index was virtually unchanged but posted its eighth consecutive negative reading.

That said, both surveys showed that manufacturers expect business conditions to improve in the next six months. Unfortunately, both surveys' forward-looking metrics on employment don't show much change from current levels. The encouraging news is that manufacturers are looking at somewhat sunnier skies ahead now that the storm has passed, but less so than in October.

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