Sandy Effect Pushes Production Higher
Just after Hurricane Sandy made landfall I wrote:
"While the recent impact of Hurricane Sandy is yet to be assessed this could boost economic output in the very short term by roughly 0.5% which could push a recession in the U.S. out to the 2nd or 3rd quarter of 2013."
As expected, the economy is seeing a short term bounce in economic activity as the Northeast comes back to life. There was a large loss of automobiles due to storm related flooding while much of the industrial production was shut in. The restart of activity shown in this month's reports, as expected, showed sharp gains for November. Econoday summed it up well:
"Industrial production rebounded in November with notable help from recovering from Hurricane Sandy and a boost in auto assemblies. Industrial production rebounded 1.1 percent, following a decline of 0.7 percent in October (originally down 0.4 percent). The market consensus was for a 0.3 percent gain.
In November, the manufacturing component increased 1.1 percent after dropping 1.0 percent in October. Analysts expected a 0.4 percent boost. According to the Fed, nearly all the decline in factory output in October is estimated to have been related to Hurricane Sandy, and the increase in November reflects a post-hurricane rebound in production as well as the solid advance in the output of motor vehicles and parts. Within manufacturing, increases were widespread in November across both durable and nondurable goods industries.
Capacity utilization for total industry rose to 78.4 percent from 77.7 percent in October. The market forecast was for 78.0 percent."
While manufacturing has seen very volatile swings over the last two months due to effects of Hurricane Sandy the overall trend of the data still remains very negative. The chart below shows the year over year change in both capacity utilization and industrial production.
As stated above the biggest contributor to the surge in the November report came from motor vehicle manufacturing as dealer inventories were restocked in the damaged areas. This is not a sustainable boost to production, or utilization rates, and will fade over the next reporting period.
Furthermore, October's rate was revised down from a previously reported -0.4 to -0.7. While the media immediately dismissed this downward revision due to Hurricane Sandy; it is important to remember that said storm did not impact the U.S. until the last five days of the month. Therefore, while there was some impact to the production and utilization rates it was not entirely due to the storm. The storm excuse also does not account for the decline in the data from its peak in July as shown in the chart below.
While the pick up in production and utilization is encouraging this data is subject to heavy backward revisions which will be released in March of next year. From Zero Hedge:
"The Federal Reserve Board plans to issue its annual revision to the index of industrial production (IP) and the related measures of capacity utilization at the end of March 2013. The revised IP indexes will incorporate detailed data from the 2011 Annual Survey of Manufactures, conducted by the U.S. Census Bureau. Annual data from the U.S. Geological Survey regarding metallic and nonmetallic minerals (except fuels) for 2011 will also be incorporated. The update will include revisions to the monthly indicator (either product data or input data) and to seasonal factors for each industry. In addition, the estimation methods for some series may be changed. Any modifications to the methods for estimating the output of an industry will affect the index from 1972 to the present."
Based on the underlying trends of the manufacturing reports in recent months (see here) it is highly likely that said revisions will be fairly negative. This is the problem that many of the economists, and analysts, are going to run into when pointing to the most recent data point as evidence that there is "no recession" in sight. As I stated earlier this month:
"Are we in a recession now? The answer is 'no' but evidence continues to mount. In all likelihood we will not know for certain until after the fact as we must wait for the economic data to be revised in the months ahead. Regardless, the trend of the data is clearly weakening at a rate which most likely puts the economy at risk within the next year. More importantly, it is the impact of slower economic growth on corporate earnings, and outlooks, which should be of the greatest concern to investors as that is what truly drives returns.
With any 'deal' on the fiscal cliff, and upcoming debt ceiling debate, leading to increased taxes, and reduced government spending, the headwind towards economic growth will continue to increase. So, while we are not currently in a recession - the market will react to the expectations of the event well before the media acknowledges it. Complacency is a dangerous thing when it comes to investment portfolios."
While today's report is certainly better than a "sharp stick in the eye" it really tells us very little about the real trends of the overall economy. The next couple of months will be much more telling as actual data on retail sales, and "post-Sandy effect" data on production and employment, is made available.
In the meantime, market participants remain tied to the flow of the newscycle from Washington in regards to the "fiscal cliff." My best guess is that regardless of what "deal" is struck the majority of the people, and most likely the market, are going to be disappointed.