New York Regional Manufacturing Survey Weakens Further

By Rom Badilla, CFA

September 18, 2012

Manufacturing in the New York region contracted for the second consecutive month suggesting slowing growth. The Federal Reserve Bank of New York released the results of its monthly Empire State Manufacturing Index which is a regional conditions gauge and reflects current and future business activity. The index which covers manufacturing in New York, northern New Jersey, and Southern Connecticut fell in September to a reading of -10.41 from -5.85 in the prior month. Market participants were expecting an improvement over last month as the median forecast by economists was at -2.00. An Empire Manufacturing Index reading above zero represents economic expansion while below it shows contraction for the sector. The Index along with the Philly Fed survey, which is due for release on Thursday, is a leading indicator of the national manufacturing gauge, released by the Institute for Supply Management which is used to determine the health of the overall economy.

Empire State Manufacturing Survey

The weak headline was mostly due to drops across all of the components which reveal further deterioration of business activity.  The New Orders sub-index for September which is a gauge of demand fell deeper in contractionary territory with a reading of -14.03 from a -5.50 in the prior month. Similarly, Unfilled Orders fell to -14.89 from a prior month print of -10.59 while the Number of Employees sub-index collapsed from 16.47 in August to 4.26. Furthermore, Shipments edged lower from 4.09 to a September reading of 2.75.

While current activity has fallen, the six-month outlook for manufacturers in the region appears better based off the details of today’s report. The General Business Conditions survey which represents the respondents’ views about the likely direction of these same indicators six months from now surged from 15.20 last month to 27.22. The outlook for New Orders jumped to 17.02 in September from 2.35 in the prior month. Outlook for Shipments moved higher by more than 4 points to 12.77 while the outlook for employment improved from 3.53 last month to 8.51.

While many use the Empire State and Philadelphia indices as a leading indicator for the national survey, the regionals surveys have suggested a gloomier picture for the manufacturing sector which conflicts with the ISM survey. The ISM Manufacturing Survey which is released the first week of the following month has been standing near the threshold between positive and negative business activity.

Barclays’ economist, Cooper Howes wrote in their latest Economics Research – Instant Insights his thoughts on today’s release and how it may affect the national Purchasing Managers Index:

The ISM index has remained below 50 for three consecutive months now but has not seen the same magnitude of decline as the Empire State and Philly Fed indices have. The Chicago PMI, on the other hand, has been relatively resilient and remained in positive territory. Right now it appears that the ISM is on a similar path to the latter, albeit at a slightly lower level; it remains to be seen if that trend can be continued in light of the recent softness in manufacturing data.

Since the Empire State survey has been diverging markedly from the ISM survey in recent months, today’s data should not translate into a steeper drop for the national survey. Furthermore, the Outlook components improved and suggest a brighter environment for manufacturers, six months from now and into 2013. Interestingly, this crosses over and beyond the election and the Fiscal Cliff where many are suggesting a huge drop off in economic growth due to the potential for the higher taxes. Given the recent burst in asset prices coupled with the outlook components, it appears that the general public continues to discount its potential effect on economic growth and how it could derail the rebound. While bulls are making new highs in prices fueled by Fed induced liquidity, the Fiscal Cliff is fast approaching and politicians will need to make the tough choice. Knowing their history, indecisiveness and brinkmanship could ensue which may translate into a reversal of the rally and a renewed interest for safe haven securities.

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