National Economic Update
Hurricane Sandy Blurs the Picture
December 13, 2012 · Update in PDF
Economic indicators released for October and November have been mostly downbeat, although the contribution of the late-October Hurricane Sandy has been difficult to assess. The manufacturing sector’s uptick in September proved to be temporary as the softening seen since the beginning of the year resumed. Consumption growth was revised down and is now somewhat more consistent with tepid business investment. Employment growth, on the positive side, remained near its recovery average despite expected disruptions from the storm.
Another Troubling Improvement in GDP
Real gross domestic product (GDP) in the third quarter was revised up to an annualized 2.7 percent from the initial estimate of 2 percent. As with the initial release, the headline number was higher than expected, but the underlying detail was not encouraging. The revision was driven by a higher contribution from inventory accumulation, which is not likely to provide a sustained boost to output growth (Chart 1).
One of the only bright spots in the initial release—slightly higher consumption growth—was also revised lower as the contribution from personal consumption expenditures (PCE) went from an annualized 1.4 percentage points to 1. If contributions from inventory accumulation and government are excluded, leaving final sales to private purchasers, growth was an annualized 1.3 percent in the quarter—the weakest rate since third quarter 2010.
Sandy Distorts Economic Data
The magnitude of Sandy’s impact on the economic data is not clear. Initial claims for unemployment, typically one of the timeliest signals of labor market strength or weakness, spiked to a seasonally adjusted 451,000 in the week ending Nov. 10 (Chart 2). While the jump was much larger than expected, almost all of it can be ascribed to Sandy. Indeed, by the week ending Dec. 8, claims had fallen to 343,000, well below the four-week moving average before the storm struck.
Manufacturing output growth has slowed considerably since the early part of the year, with small monthly gains interspersed with large monthly declines. From April to September, the 12-month growth rate in manufacturing output slid from 5.7 to 3 percent. It fell 0.9 percent in October, when it was adversely affected by Sandy. Even absent the storm, the Federal Reserve Board estimates that manufacturing output would have been flat in October.
Manufacturing weakness continued despite Institute for Supply Management (ISM) manufacturing index readings in September and October that were above 50, a level generally, although not perfectly, consistent with expansion (Chart 3). The ISM index fell back below 50 in November to 49.5, its lowest reading since 2009. One would have expected the disruptive weather to impact the November survey, but Sandy seems to have been only a minor player. ISM publishes a few respondent comments along with the aggregate survey results. Most mentioned either continuing weakness in demand or uncertainty over the fiscal cliff—only one out of the 10 published comments mentioned the storm.
Employment Withstands Storm
The employment report was one of the few exceptions to the generally lackluster data releases. Nonfarm payrolls rose by 146,000 in November, very near the average since payrolls began expanding again in 2010 (Chart 4). The storm did not substantively impact November employment estimates, the Bureau of Labor Statistics reported. Moreover, job growth is holding up, even at its moderate pace, in the face of other weakening indicators. Payroll employment in goods-producing industries fell by 22,000, consistent with the weakness in manufacturing, but services payrolls made up the slack, expanding by 168,000. Nonfarm payroll growth was revised down, from 171,000 to 138,000 in October and from 148,000 to 132,000 in September, tempering optimism from the establishment survey.
The household survey reported that the unemployment rate dropped to 7.7 percent in November from 7.9, another surprise improvement. However, employment according to the household survey actually fell by 122,000. This decline would have resulted in an increase in the unemployment rate had it not been accompanied by a larger number of people dropping out of the labor force. The household survey measure of employment has historically been more volatile than the establishment survey, which draws from businesses rather than individuals, and thus month-to-month variations should be taken with a grain of salt.
Inflation Remains Subdued
Underlying consumer price inflation has slowed considerably over the past several months. The six-month Trimmed Mean PCE inflation rate, which excludes prices that increased and decreased the most, fell from its recent annualized high of 2.2 percent to 1.5 percent as of October. The trimmed mean’s 12-month rate now stands at 1.7 percent, down from 2.1 percent in January.
Headline PCE inflation, which doesn’t exclude prices, accelerated in August and September and posted one-month rates above an annualized 4 percent. As a result, the 12-month headline rate moved up to 1.7 percent in October from 1.3 in July. Gasoline was the main culprit, but since then, the price of Brent crude oil—the key determinant of gasoline prices—has declined considerably (Chart 5). Weekly retail price data show gasoline prices down roughly 8 percent (not annualized) in November. That decrease will almost surely produce negative one-month headline rates for November.
Economic activity appears to have slowed slightly in October and November from a modest pace, although it’s not clear how much of this was caused by Sandy. The housing sector remains a bright spot, with potential to grow much faster. Business investment improved slightly in October but is still depressed, and consumer spending slowed after a brisk end of the third quarter. GDP growth in the quarter looks even less sustainable than it did from the initial release. Acceleration in a component other than government or inventory investment is likely needed to prevent output growth from slowing in the fourth quarter.
About the Author
Atkinson is a senior research analyst in the Research Department of the Federal Reserve Bank of Dallas.