The latest Empire State Manufacturing Survey, produced by the Federal Reserve Bank of New York, indicates a pickup in May manufacturing activity on the surface. Closer inspection always adds color, and in this case, we believe reflects growing concern about the outlook. It also shows a bifurcation developing within the sector, as mixed messages are delivered about the trend of business. We believe the report intimates infection from European markets reaching relative U.S. exporters. Given the data we've reported on around the industrial sector and manufacturing and international trade, and based on what we see developing globally, we view the headline improvement as just a blip in a trending dip.
The market celebrated Tuesday morning's early release of the Empire State Manufacturing Survey because of the headline index increase. The SPDR Dow Jones Industrial Average (NYSE: DIA) rose to start the day, before other considerations (read Greece) weighed. The Industrial Select Sector SPDR (NYSE: XLI) traded choppy, though higher. Major industrial names including General Electric (NYSE: GE), Caterpillar (NYSE: CAT), UPS (NYSE: UPS) and United Technologies (NYSE: UTX) were each convincingly in the green. The NY Fed's measure of area business showed its General Business Conditions Index gained to a mark of 17.09, up from 6.56 in April. Bloomberg's survey of economists pegged the increase at a lesser level of 10.0 based on past performance and other indicators that reflected an uncertain direction.
The sub-index measuring new orders, which is a tangible indicator of how the business environment might be developing, inched higher to 8.3, from 6.5 in April. Shipments, however, were significantly higher, with the component measure rising to 24.1, from 6.4. Price increase has been contributing to gains here and likely continued to do so in May. That said, the indexes measuring both prices paid and received showed some moderation of the increases.
While the data showed overall gain, closer inspection shed light on a sort of bifurcated manufacturing environment. Something is developing, as the gain hid the fact that while many businesses reported improved activity, there was a similar increase in the number of manufacturers reporting less business activity. Even as 40.5% of those surveyed reported better business conditions, a gain over April's 27.9%, 23.4% reported deteriorated business, versus 21.3% in April. Worse yet, 31.6% of those surveyed saw decreased new ordering activity, versus the 22.7% that said the same in April. That contrasted with the May gain in those who saw improved new ordering, where 39.9% saw improvement versus the 29.2% that said so in April.
The weird changes were fueled by decreasing numbers of managers reporting no change. The divergence of data may be reflective of specific markets served by manufacturers. Perhaps those serving Europe to a greater extent are now seeing decreased business. The latest International Trade Report reflected a wider trade deficit between the U.S. and Europe, which we intimated could be due to decreased European demand for U.S. goods and services. Of course, we now know that Spain is in recession as Greece falls into depression. Trouble seems to be spreading as an ill-timed austerity movement is implemented too aggressively across the euro region.
The NY Fed's report also showed a perception among manufacturing managers that business conditions might deteriorate over the next six months. The forward looking indicators for General Business Conditions, New Orders, Shipments and Employment all decreased in value. Also, expectations for capital expenditures and technology spending declined. This all portends trouble, as the expert ear on the rail is feeling a bad vibe coming. Ironically, given the expected business slowdown, price increases are seen by manufacturing managers. I see inflation coming too, but I believe it will be selective and dynamic, and will follow nearer-term deflation in industrial commodity prices. As a result, I'm not a fan of names like BHP Billiton (NYSE: BHP), Alcoa (NYSE: AA) and Vale S.A. (NYSE: VALE) over the short-term, though I believe scarcity, global demand and a breakdown of global trade, combined with fiat currency devaluation, will eventually drive the price of all materials and goods much higher.