Manufacturing Optimism Tanking Hard In The Northeast

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Includes: XLI
by: Jenny Coombs

Summary

The Philadelphia general business index took a turn into negative territory for the first time since February 2014, at a reading of -6.0 from a prior level of 8.3.

Surprisingly though, the new orders component was not the culprit for weakness as it actually rose to 9.4 from 5.8 in the prior month.

The employment component rose to a 5-month high of 10.2 from 5.3 in the prior month. This ought to imply some early optimism for the September employment report.

Someone needs to call a doctor, because there is clearly something wrong with the manufacturing sector, or at least in the Northeastern quadrant of the United States. In New York, the Empire State Manufacturing Index has been deep in negative territory for the last two months. Now the Philadelphia Fed Manufacturing Index apparently has the same condition as the general business index took a turn into negative territory for the first time since February 2014, at a reading of -6.0 from a prior level of 8.3. Economists expected the figure for September to be slightly worse, but still in positive territory at 6.3.

The chart below shows the downward progressions of the general business conditions component in blue. Surprisingly though, the new orders component (in green) was not the culprit for weakness as it actually rose to 9.4 from 5.8 in the prior month.

It is important to note though that for both the Philadelphia Fed and Empire State surveys, the headline readings are not composite scores of separate components. Rather they serve as a sentiment of scores through a month-to-month assessment of overall business conditions - in other words, forward-looking rather than a snapshot of the status quo.

This is evident in the fact that most of the individual components in the Philly Fed survey were actually quite positive. As mentioned above, new orders actually improved over the prior month despite unfilled orders contracting further to a reading of -6.6 from -1.0 in August. Shipments contracted slightly over the prior month but still showed a very strong reading of 14.8.

Despite the headline index coming in weaker than expected, I predicted last week that at least the employment portion of the Philly Fed survey would yield some positive results and this turned out to be the case. The employment component actually rose to a 5-month high of 10.2, well above the 5.3 reading from the prior month. This ought to imply some early optimism for the September employment report, at least for the Northeastern U.S.

Pricing was the biggest culprit for negativity - much like the Empire State report - as it makes exporting much more difficult. The prices for final goods, also called prices received, stayed in contractionary territory at a reading of -5.0, roughly the same as the -4.9 in August. Prices paid also showed a significant decline over the prior month, though still in positive territory at 0.5 versus the 6.2 reading in the last month.

It is primarily global volatility and stock market declines that are leading to the overall drop in consumer confidence, however data from this report and the other two industrial reports earlier this week are implying that the weakness in the industrial sector may soon manifest as a drop in business sentiment. The industrial sector, in particular manufacturing, is worth watching for any signs of a reversal in health. Industrial Select Sector SPDR ETF (NYSEARCA:XLI) shares are still well off their 52-week highs, and while I think a reversal in this data would cause shares to rally, I do not believe that will happen anytime soon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.