The old Sinatra song goes, "If I can make it there, I'll make it anywhere," but the latest data from the New York Federal Reserve Bank indicates manufacturers in the New York state area are not cutting it lately. Considering the national importance of some of these companies, the data should reflect broader reaching economic deterioration.
The New York Fed's Empire State Manufacturing Survey shows a generally deteriorating trend that extends back for nearly a year now. There have been dips and blips, but the trend depicted in the chart linked to above here shows the longer term downtrend very clearly.
The latest survey showed the General Business Conditions Index actually slipped into economic contraction in May. The Index fell a precipitous 4 points to negative 1.43 in May, from +3.05 in April. The result seemed to completely catch economists off-guard, because their consensus forecast was for an improvement in the measure to a mark of 3.75.
New York's major makers of goods include some of the nation's most important companies, and so reflect on national business activity, not just the New York area economy. Some of the important companies include IBM (IBM), Pfizer (PFE) and PepsiCo (PEP). This list includes major makers of goods of all types.
New York Company
News Corp. (NWSA)
Philip Morris (PM)
Bristol-Myers Squibb (BMY)
L-3 Communications (LLL)
- Not all employees are in NY
- TTM is Trailing Twelve Months
- Rounded data from Yahoo Finance
The General Business Conditions Index had been reflecting economic expansion since February, but before that it reflected several months of contraction. I attributed that late 2012 falloff to the lack of clarity around how the U.S. government would handle the fiscal cliff and the debt ceiling issues around the turn of the year. There was a paralyzing impact on business heading into the New Year that was followed by a sort of relief rally in the stock market and a reengagement of business in industry. But what has economic conditions deteriorating now?
Looking at the survey, it seems whatever is developing is in the early stages of development. New York manufacturers were almost evenly split as to their opinions on the direction of business; with 26% saying it was deteriorating and 25% still indicating improvement. All the rest of the data was disturbing though. For instance, while shipments were flat, new orders contracted and unfilled orders fell deeply into contraction, indicating that buyers of goods are failing to follow through on orders. Also, pressure was coming off prices paid, which in my view likely reflects deteriorating demand for goods. For now, it seems manufacturers retain their own pricing power, but that should not last either or else orders and sales will fall off further. Employment indications were mixed, as the number of employees increased while workweek declined. Companies do not layoff except under extreme conditions, because of the costs tied to firing someone these days. That's another reason why employment is a lagging indicator.
Indexes measuring the outlook of NY manufacturers for six-months down the road deteriorated as well, and that's bad news for hiring and capital expenditure planning. This is a broad warning for investors, as the New York economy is reflective of national demand for goods and services. Add to this information the fact that a majority of economic data of late has been soft, and there's reason for concern. Even so, the SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and the PowerShares QQQ (QQQ) were modestly higher over the past two days. I'm going to discuss the perverse logic behind the counter-intuitive rise in a near-term article, so stay tuned.