Though second-half economic growth is widely expected to continue its steady 3.5% trend, September's hurricanes did scramble a host of economic indicators, from plunges in consumer confidence to record spikes in energy prices. Indicators on the manufacturing sector, for the most part, show a sizable decline in September followed by a quick recovery in October. But the ISM manufacturing survey, a closely watched leading indicator, stands out for signaling nothing but strength.
Let's start off with our sharpest looking graph: the Philadelphia and New York Federal Reserve manufacturing reports both show a "v" pattern from August to October. The Empire State's survey is running hotter than the Philadelphia report but for anecdotal reports that's less important than the direction of change. These reports as well as the ISM report are based on assessments of business conditions from purchasers and managers.
Less subjective is actual sampling of activity as compiled by the Federal Reserve and the Commerce Department. But accuracy comes at the price of speed as the anecdotal reports are posted well ahead of industrial production or durable goods. Still, as seen in the graph below industrial production closed off the right side of the "v" in October. Durable goods orders for October have yet to be released. These graphs of course are super close-up views for indicators, especially for durable goods orders which are volatile in the first place and where revisions can be sharp (note that a nondescript plunge in July is much more severe than September's dip!). But even if conclusions are dodgy, it's still useful to put Katrina and Rita -- together the worst natural shock in memory -- under the microscope.
A closer look does show a twist. As the two following graphs show, we find that the ISM index is not alone. Though durable goods orders were down in September, durable goods shipments actually rose -- this despite port closures in the Gulf and a strike at Boeing! Though surprisingly strong, shipments lag new orders, which of course point to future shipments.
Another survey that shows strength through the storms is one I compile for Market News International. MNI's capital goods index, which is based on company news, did take a dip in September but nothing dramatic. Growth was supported by the pass through, and often then some, of energy and material costs.
Despite supporting evidence, the ISM's hurricane rally is not being borne out by factory data. The Federal Reserve didn't pay special attention to the ISM's strength at their Nov. 1 policy meeting, though the minutes do note industrial production was in fact strong excluding all the special factors. Norbert Ore, who heads the ISM survey and is himself a purchaser, attributes the strength in his report to concerns over shortages and shipping delays. He believes many purchasers spread their orders over a greater number of suppliers, which in turn inflated the report's new order reading. Perhaps, but new orders moved nearly in tandem with other readings in the report, including production.
Bottom line
Until all the numbers are in and all the revisions made, the exact impact of Katrina and Rita on the manufacturing sector is uncertain. The history books have yet to be written. Let's close with a look at 9/11 and its long term aftermath. Then, shipments did fall and, even after a full year, were still below pre-shock levels. And with no concern of shortages and in the middle of a post Y2K contraction, the ISM index did then what it didn't do this time, that is fall sharply. But it recovered more quickly and more sharply than shipments. Special strength in the ISM, as hurricane rebuilding gets underway, may be something to watch for.
Mark Pender, Contributing Editor, Econoday
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