Hurricane Sandy Slams Industrial Production in October

November 20, 2012

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Production at U.S. industrial facilities decreased in October, largely due to Hurricane Sandy, which held down output in the Northeast states toward the end of the month and disrupted operations across a range of industries.

Industrial production in the United States decreased 0.4 percent in October after posting a 0.2 percent gain in September, according to the U.S. Federal Reserve. Last month’s decline was primarily due to the effects of Hurricane Sandy, which was estimated to have cut the rate of change in output by nearly 1 percentage point.

The decrease in industrial production was unexpected, as analysts had forecast output to climb in October, according to MarketWatch. The most severe storm-related effects were in utilities, chemicals, food, transportation equipment and electronic products. Overall damage from Hurricane Sandy is projected to be in the range of $50 billion.

Manufacturing output, which accounts for roughly 12 percent of the U.S. economy and is the largest segment of industrial production, fell by 0.9 percent in October, following a 0.1 percent increase in September. Machinery production fell 1.9 percent, electronic equipment output fell 1.4 percent, business equipment manufacturing declined 1.2 percent (the steepest drop in more than three years) and consumer goods output dropped 0.9 percent.

“Aside from the storm's impact, the trend in industrial production is biased towards weakness as fears over higher taxes and sharp cuts in government spending deter businesses from ramping up production and capital investment,” Reuters reports. “Cooling global demand is also crimping output.”

Meanwhile, utilities output inched down 0.1 percent in October after remaining relatively unchanged in September. However, the mining category – which includes gas and oil drilling – increased 1.5 percent, the biggest single-month gain in a year.

Apart from the effects of the hurricane, a slowdown in automotive production also contributed to the contraction in overall industrial output.

“Motor vehicle and parts output decreased 0.1 percent after a 1.8 percent drop a month earlier,” Bloomberg News explains. “Auto manufacturing has been a bright spot in the economy, with cars and light trucks selling at a 14.22 million annual rate in October after climbing to 14.88 million in September, the strongest since March 2008…”

The industrial capacity utilization rate, which indicates how much of the nation’s production capabilities are currently in use, fell 0.4 percentage points to 77.8 percent, 2.5 points below the 1972-2011 long-run average, but well above the record low of 66.8 percent hit in mid-2009.

Although the storm hurt retail sales last month, most economists expect its effects to fade over the next few weeks. Consumer spending, which accounts for roughly 70 percent of the U.S. economy, may depend more on conditions in the labor market. Lower unemployment is likely to provide a strong boost to spending nationwide.

“There have been hopeful signs that the job market is improving,” the Associated Press notes. “Employers added 171,000 jobs in October and hiring in August and September was stronger than first estimated. The economy has gained an average of 173,000 jobs a month since July. That's up from an average of 67,000 a month in April through June.”

Troubled international markets are also having a significant influence on U.S. manufacturing and the economy as a whole, as demand for U.S.-made goods has weakened in the midst of a financial crisis afflicting the European Union.

“The key drivers of demand for U.S. manufactured goods have all been compromised by negative economic forces. U.S. export growth, which had been slowing, actually contracted during the third quarter as a number of regional challenges have significantly weakened global demand for U.S. goods,” Cliff Waldman, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted. “Further, the growth of U.S. equipment and software demand, which had also been slowing, stalled completely during the third quarter with economic and policy fears acting as disincentives to capital investment.”

 

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