Empire State Manufacturing Surprises To The Downside (Sandy Notwithstanding)

by: Doug Short

Until the past few months, I've not routinely reported on monthly manufacturing data, regional or otherwise. However, now that I'm tracking the Big Four economic indicators, which includes Industrial Production, I'm watching these indexes more closely. This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions was not good.

There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. The -8.1 was substantially below the Briefing.com consensus of 2.0.

Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):

Here is the opening paragraph from the report. The one positive note was the modest improvement in future business conditions:

The December Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a fifth consecutive month, falling three points to -8.1. The new orders index dropped to -3.7, while the shipments index declined six points to 8.8. At 16.1, the prices paid index indicated that input prices continued to rise at a moderate pace, while the prices received index fell five points to 1.1, suggesting that selling prices were flat. Employment indexes pointed to weaker labor market conditions, with the indexes for both number of employees and the average workweek registering values below zero for a second consecutive month. Indexes for the six-month outlook were generally higher than last month, although the level of optimism remained at a level well below that seen earlier this year.

Superstorm Sandy was certainly a factor in the contraction, but general sense of the report is that Sandy was responsible for only a part of the contraction:

Manufacturers were also asked about superstorm Sandy's recent and expected effects on revenues: Down-state establishments estimated that revenues in October and November were 7 percent and 5 percent lower, respectively, than they otherwise would have been.

The supplemental section of the accompanying PDF report includes the heading Manufacturers Foresee Steady Price Pressures, Modest Impact from Sandy.

Since this survey only goes back to July of 2001, we only have one complete business cycle with which to evaluate its usefulness as an indicator for the broader economy. Since the Great Recession, the index contracted for one month in late 2010 and five months in 2011 -- the latter at a shallower level than at present.

The Empire State Survey is focused on manufacturing, so it's only a subset (albeit a very large one) of the Federal Reserve's Industrial Production Index, which covers manufacturing, mining, and electric and gas utilities. The upper left corner in the four-pack below shows the recent dip in Industrial Production. Note that this chart illustrates the percent off the all-time high:

See also the latest ISM Manufacturing Business Activity Index, which has been in contraction mode for four of the past six months. This follows 34 consecutive months of expansion following the Great Recession:

We'll keep a close eye on some of the regional manufacturing indicators in the weeks ahead.