ILMA Compoundings December 2017 - 10

INDUSTRY RUNDOWN

Making Sense of Manufacturing in
the Aftermath of Harvey and Irma
Cliff Waldman, chief economist at the Manufacturers
Alliance for Productivity and Innovation (MAPI), described
back-to-back hurricanes Harvey and Irma as the "black
swan [event] of black swan events." Meaning, even in
the category of random, unexpected events, these tandem
hurricanes stood out as a fluke.
While predicting the unusual is difficult, measuring the
impact is complicated, but possible. Waldman said that
economists approach this task of measurement through the
summation of direct losses and indirect losses.
Direct losses include buildings and structures that are destroyed or damaged, and indirect losses include factors such
as work-time disruptions, wage distortions, utility disruptions
and changes in consumer and business spending.
Immediately after a disaster, there is typically a decrease in
labor supply while the demand for labor is increased. This
imbalance in supply and demand will often raise incomes

Before the hurricanes, energy
as a share of total manufacturing output had been growing."

DECEMBER 2017

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in disaster-affected areas. Usually, there is also an increase in
the sourcing of products and services.
ThomasNet reported a significant increase to the sourcing
of products and services related to recovering from Harvey
in the Houston area, and that similar results were seen in
Florida after Hurricane Irma. Searches for building materials
were up anywhere from 150 to 2,000 percent during the
two weeks after Hurricane Harvey. Sourcing for hospital
beds was up more than 7,000 percent, dehumidifiers were
up 2,400 percent, and janitorial supplies were up 4,400
percent. Those numbers give perspective on what the people
of Houston are dealing with in the short-term.
Waldman said that there is also a positive correlation
between natural disasters and long-term economic growth,
because older equipment lost because of damage gets
replaced with newer technologies.
According to MAPI, manufacturing was experiencing
very moderate growth. It predicted the same limited rate of
growth to continue, but that was before the hurricanes hit.
Now the numbers will be more difficult to predict.
Before the hurricanes, energy as a share of total manufacturing output had been growing. In fact, it came close to
doubling between 2002 and 2012. According to the Federal
Reserve Board, however, Hurricane Harvey delivered a significant hit to the growth of petroleum and chemicals in August.
At the time of this writing, the Federal Reserve's Industrial
Production and Capacity Utilization report showed industrial
production rose 0.3 percent in September. However, for
the third quarter as a whole, industrial production fell 1.5
percent at an annual rate; excluding the effects of the hurricanes, the index would have risen at least 0.5 percent.
The latest Manufacturing ISM® Report On Business®
showed a two percentage-point increase in economic activity
in the manufacturing sector in September over August numbers. Of the 18 manufacturing industries reporting, only
furniture and related products showed a downturn.
In addition to the above reports, Waldman suggests that
manufacturers keep their eye on the durable goods report
and the third-quarter GDP report for clues on the impact
that these unexpected events will continue to have on manufacturing. Waldman also looks for a spike in housing starts
that lasts as a signal that recovery is underway.

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ILMA Compoundings December 2017

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