Hurricane Sandy not totally to blame for drop in October manufacturing output

November 19, 2012

The aftermath of Hurricane Sandy may still be felt in some parts of the country, but the superstorm may have had an unexpected effect on manufacturing output at the end of October, believe economists at the Federal Reserve.

According to Reuters, early indications show that industrial production contracted slightly at the end of the month, with figures from the Fed showing that Sandy may have reduced the rate of change in output by almost one percentage point. The industry had shown a slight increase of 0.2 percent in September, however the arrival of the storm on October 29 may have put a dampener on US. manufacturing strategy with the Federal Reserve revealing that output dropped by 0.4 percent overall.

Sandy is estimated to have caused $50 billion in damage, and some economists believe that companies that produce electronic goods, transportation equipment, computers, chemicals and food would all have been affected by the extreme weather. Parts of the North East of the country were without power for some days, a factor which even the most prudent business strategy would be unlikely to take into consideration.

As devastating as Sandy was, some economists feel that the potential fiscal cliff is still playing a large role in future manufacturing strategy. The current administration has been meeting with business leaders of U.S. manufacturing companies to assure them that every attempt will be made to ward off the predicted $600 billion that could be drained from the economy in 2013 if an agreement is not reached in Congress.

"When you see that kind of weakness, you can't really attribute it to the storm," said Christopher Low, chief economist at FTN Financial in New York. "It's a pattern of weakness that has happened in the past three months. The most likely explanation is the weakness in capital equipment orders, which could be attributed to caution about the fiscal cliff and its possible impact on the economy."

According to the Fed, manufacturing output was hardly changed from the September figures if the effects of the storm were excluded. Figures show that factory operating rate dropped to 75.9 percent while capacity utilization, an indication of how companies are implementing a dedicated business strategy fell to 77.8 percent.

"The problem is that we were already seeing a slowing in the sector and so it is difficult to disentangle what is going on," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York. "We are poised for a ratcheting down in economic growth."