Even compared to the difficult weather events of recent years, Hurricane Sandy was especially cruel.  The powerful hybrid mega-storm resulted from a confluence of factors so odd that the many victims in the heavily populated northeast must have wondered what they’ve done to deserve such a fate. In some cases individual lives and communities will be affected for months and even years to come. Tragically, there were fatalities.  Coming amidst a difficult recovery from the financial and economic storm that hit the world just four short years ago, economists now have the challenging task of assessing the economic impact of the Halloween nightmare that befell the U.S. northeast.

The October report on industrial production (from the Federal Reserve) offers clues on both the impact of Sandy and on the current status of U.S. factories that are confronting growing global challenges. Mostly due to the impact of the hurricane, U.S. industrial production contracted by 0.4 percent in October.  As the devastating storm pummeled the industry-heavy Northeast, manufacturing was disproportionately affected, contracting by 0.9 percent.  The breadth of the decline was large with consumer goods output falling by 0.9 percent and business equipment output contracting by 1.2 percent.  As with other natural disasters, it will take some months for the data to return to a status where the hurricane will not be a factor.  It will be difficult to fully assess the direction of U.S. manufacturing through the balance of this year.

Nonetheless, it seems clear that growing concerns about the manufacturing outlook remain justified. The Federal Reserve notes that excluding Sandy-related impacts, factory output was roughly unchanged from September, a further sign that the significant weakening in manufacturing output growth seen in the second and third quarters of 2012 remains an unfortunate reality into the fourth quarter.  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 of 2012 as a number of regional challenges have significantly weakened global demand.  Further, the growth of U.S. equipment and software demand, which had also been slowing, stalled completely during the third quarter.  Economic and policy fears have clearly been acting as disincentives to much-needed capital investment. 

In the immediate aftermath of the 2008-2009 U.S. recession the manufacturing sector was a key catalyst of the otherwise tepid rebound. The factory sector is now being negatively impacted by a troubled global economy and by U.S. policy uncertainty.  Over the short term U.S. manufacturing will most likely grow at a sluggish pace.  In a world full of troubles, however, something worse cannot be ruled out.