-October Data Could See Big Revision in Coming Months

By Joseph Plocek

WASHINGTON (MNI) – Could the Fed be overstating the storm-affected drop in
October industrial production?

First the facts. There is no doubt October factory data were weak.
Industrial production fell 0.4% after a revised 0.2% gain in September and 1.1%
drop in August. That is no ball of fire for the three month growth pace.

The Fed report explained that the storm had a big impact: “Hurricane Sandy,
which held down production in the Northeast region at the end of October, is
estimated to have reduced the rate of change in total output by nearly 1
percentage point. The largest estimated storm-related effects included
reductions in the output of utilities, of chemicals, of food, of transportation
equipment, and of computers and electronic products.”

The implication is that without Sandy, IP would have been closer to a 0.6%
increase.

The composition of the report suggests some strength. Manufacturing fell
0.9%, but was estimated at unchanged excluding the storm effects. Utilities
slipped 0.1% which also showed the storm effect. But mining jumped 1.5% after a
large dip in August also related to precautionary closings for tropical storms.

Production is now up 1.7% over the year, a modest pace but still growth. In
the past revisions in production of 0.2 point per month have not been unusual.

October was only the first estimate of IP and according to economist
Michael Feroli at J.P. Morgan, “only about one-quarter of the report is
estimated using physical product data, so the estimate of output and the storm
effect may change” ahead as hard data become available.

MNI understands Fed officials estimated the storm’s effects using
information provided by the Federal Emergency Management Agency on the effects
in hard-hit regions such as New York and New Jersey. Recent Bureau of Economic
Analysis data show the Mideast region (one of the eight areas BEA uses to divide
the country) lagged national growth in 2011 but accounted for an outsized 18% of
real GDP.

This region consists of New York, New Jersey and Pennsylvania, as well as
Maryland, Delaware and the District of Columbia where the storm impact was more
limited. New York and New Jersey alone accounted for about 11% of GDP. At 11%
times 1/52, it is easy to see how every week of work stoppage after a disaster
might cut about 0.2 point from GDP.

But GDP consists of far more than factory and heavy output. Services and
nonproduction middlemen account for more than 80% of output and possibly did not
depend on electricity for sales. Schools and government reopened within a week
in the Northeast, and other businesses rebounded faster.

Perhaps in the aftermath of the storm the economists at the Fed simply have
to readjust their algorithms, at least for a month, so that utilities inputs are
not the driver of production.

So the October data might be revised significantly next month with
November’s report as more information comes in on actual physical production.
Moreover, the Fed gets another chance to revise weakness away in the March 2013
production benchmark.

A bottom line is that IP weakness probably should not be extrapolated to
other data or even considered the final word on output.

** MNI Washington Bureau (202) 371-2121 **

–email: jplocek@mni-news.com

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