Summer's Tempests Twist the Numbers
By Michael Englund and Rick MacDonald
The recent spate of hurricanes is starting to cut a swath through some key economic data. Exhibit A: the August report on industrial production, released Sept. 15. The headline figure, an increase of 0.1% over the prior month, came in well below economists' median forecast if a 0.5% gain. One of the primary culprits was Hurricane Charley, the first of the season's Category 4 storms to strike the Southeastern U.S.
And while Charley is just now making himself felt in the data, more potential distortions await from his partners in crime: Hurricane Frances, which caused further damage at the start of September, and the biggest of the bunch, Hurricane Ivan, which is expected to make landfall along the Gulf Coast on the night of Sept. 15. In addition to fears of property destruction on land, this storm is already partly responsible for a fresh spike in oil prices to the $45-per-barrel level. Indeed, economists may be sorting out the effects of the tempest-tossed summer of 2004 for some time to come.
PLENTY OF SLACK.
August's industrial production data were significantly damped by both Charley and the month's cool weather, with utility output dropping 2.4% and mining off 1.1%. Manufacturing output rose 0.5%, in line with our forecast here at Action Economics. One particularly strong spot was vehicle assemblies, which bounced to a 12 million rate in August from 11.5 million in July and 11.4 million in June.
Another key component, capacity utilization, remained unchanged at a revised 77.3%. The August update suggests that plenty of excess capacity remains in place. While utilization rates are well above their recent lows, evidence of considerable slack in the economy remains.
August weakness in industrial production was mitigated by an upward adjustment for July to show a 0.6% gain, vs. the 0.4% reported earlier. That follows offsetting revisions in the prior two months. At Action Economics, we now expect only a 3.5% to 4% growth rate for industrial production in the third quarter, following 4.8% in the second and 6.6% in the first.
This apparent downtrend should be reversed with a 7% increase in the fourth quarter, as we see a bounceback from hurricanes and cool temperatures. The annual industrial production data are on track to reveal solid 5% growth rates in both 2004 and 2005, though weather-distorted summer has obviously wreaked havoc on the utility and oil and gas sectors.
Englund is chief economist and MacDonald director of investment research and analysis for Action Economics