Manufacturing activity pushes on despite hurricane disruptions

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Industrial output continued to push ahead in September, signaling that one of the key drivers of freight demand remained solid at the end of the 3rd quarter. Production was restrained slightly by the impact from Hurricane Florence, but not enough to prevent growth in the sector from reaching a near 8-year high.

Industrial production growth topped 5% in September

Industrial production growth topped 5% in September

The Federal Reserve reported this morning that total industrial production rose 0.3% in September from August’s levels. This slightly exceeds consensus expectations of a 0.2% gain and is the fourth consecutive monthly increase in the industrial sector. Year-over-year growth has now climbed to 5.1%, marking the first time that growth has exceeded 5% since the end of 2010. Manufacturing industrial production, which strips out mining and utilities from the total, rose 0.2% during the month and is now up 3.5% from this point last year.

Like the previous month, growth in industrial output was heavily concentrated on the durable side of the economy, led by big gains in auto, wood products, and primary metals production. The non-durable side of the manufacturing sector continues to struggle, as output declined for the second straight month led by sizeable reductions in textile, clothing, and chemical production.

Limited hurricane impact

Unlike yesterday’s retail sales report where the Commerce Department declined to comment on the impact that Hurricane Florence had on performance during the month, The Federal Reserve noted today that the hurricane likely restrained growth during the month by 0.1%. By comparison, Hurricane Harvey was estimated to have subtracted approximately 0.75% from production last August when it hit the Houston area.

Production typically rebounds immediately following weather disruptions

Production typically rebounds immediately following weather disruptions

The smaller impact from Florence in part is driven by the strength of the storm itself. Harvey was one of the strongest storms in US history, causing property damage that rivaled Hurricane Katrina in 2005. By contrast, estimated property damage from Florence has been about a third of that. In addition, the Houston area is a critical area when it comes to the energy sector, and disruptions there rippled into other areas of the economy.

Typically, when there are disruptions due to weather events, production usually gets made up in subsequent months. After the US economy was hit by Hurricanes Harvey and Irma in August and September, October production surged by a percent and a half. This year, September and October numbers are likely to be affected by Hurricanes Florence and Michael, but any lost production will likely be made up in November.

Behind the Numbers:

The industrial sector has been one of the highlights in the US economy, as the strong demand for business capital equipment and strength in the mining sector has translated into manufacturing and industrial activity. This, in turn, translates to trucking and rail demand, as businesses look to get raw materials and supplies in for production and transport manufactured goods out to wholesalers once production is complete.

Most of the fundamentals for the industrial sector look solid going forward, with business demand looking healthy at the end of the year, and elevated oil prices helping to sustain investment in the energy sector. The strength of the US dollar is a bit of a concern, however, as a strong dollar encourages imports from the rest of the world instead of domestic production.

It is also worth noting that, like many other indicators on the goods side of the economy, the comparisons to last year are about to get much tougher in the industrial sector. The 4th quarter of 2017 was one of the strongest quarters in the post-recession era in the industrial sector. This is going to weigh on year-over-year growth rates even if industrial output continues to push ahead at a solid pace.

 Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.