U.S. economists are rushing to blame Hurricane Sandy for a terrible industrial production result this morning – a decline in October of 0.4 per cent – but, in truth, the trend of weak data began long before the storm.
November began with a positive non-farm payroll number that signalled a U.S. economy strengthening much faster than economists expected, but the outlook quickly deteriorated from that point. The first hint came on Nov. 9 with a disappointing wholesale inventories report suggesting that goods were being stockpiled rather than sold. Five days later, U.S. retail sales (less gasoline and autos) for October came in drastically below expectations – minus-0.3 per cent versus consensus estimates of 0.4-per-cent growth. The Philadelphia Fed index, an index of regional manufacturing activity, added to the misery with a 10.7-per-cent decline rather than the expected positive 0.2 per cent.
The 84 economist estimates for Friday's industrial production report ranged from a decline of 0.3 per cent to 0.6-per-cent growth. The actual result was that production fell 0.4 per cent. The Federal Reserve estimated that, without the hurricane, manufacturing growth would have declined sharply to zero for October from September's 0.4-per-cent pace.
The difficulty in estimating the effects of the hurricane on U.S. economic data will have investors flying blind to some extent in the coming weeks – and fiscal cliff-related corporate anxiety will make the problem worse. If Congressional negotiations fail, automatic tax increases will increase the U.S. tax burden by an estimated $600-billion (U.S.) and, by most economist's estimates, push the country into recession. Many corporations have reduced spending to prepare, providing another drag on economic activity.
In the short term, investors will likely want to sit this one out. In the absence of political clarity – both in the euro zone and the United States – and more reliable indications on the state of the global economy, confident decision making is well nigh impossible. The euro zone and Japan are now officially in recession and, while a U.S. recession is far from inevitable, it does appear that the world's largest economy is not immune from the global slowdown.