Empire Manufacturing Breaks Down

by: Bespoke Investment Group

If you were looking for signs of hope for the manufacturing sector in Friday's Empire Manufacturing report, you didn't get it. Heading into the report for January, economists were expecting the headline index to come in at a level of -4, so there was hope that it could possibly beat expectations and get back into the black. In the end, though, there was no such luck. In fact, at a level of -19.37 this month's report was the weakest reading since April 2009.

Needless to say, things aren't getting any better for the manufacturing sector in the region. Expectations for the next six months dropped even more, falling from 35.7 down to 9.5. That 26.1 point decline in the index was the second largest in the report's history (2001), behind only the 61 point decline in September 2001 when the entire region came to a complete standstill in the aftermath of the 9/11 attacks.

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The table below breaks down January's Empire Manufacturing report by each of the report components. Interestingly, the overall breadth of the current conditions components wasn't horrible. Yes, New Orders and Shipments collapsed and fell to their lowest levels since the last recession, but every other component besides Delivery Times increased, including a big jump in Average Workweek (although that component did collapse last month). On the expectations side of the table, January's numbers were not nearly as constructive, with six out of nine declining.

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Finally, one trend to note regarding the monthly Empire Manufacturing report is just how bad economists have been at forecasting it. Over the last six months, the actual reported number has been weaker than expected five times, and in three of those cases by quite a lot. In fact, the only time since 2001 that economists have been this far off the mark to the downside was in October 2011. As shown in the chart below, over the last six months the actual reported number for the Empire Manufacturing report has been an average of nine points below the consensus estimate. Broken clocks have been more accurate.