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posted on 15 February 2018

February 2018 Empire State Manufacturing Index Declines

Written by Steven Hansen

The Empire State Manufacturing Survey declined but remains in expansion. It was below expectations.

Analyst Opinion of Empire State Manufacturing Survey

I am not a fan of surveys - and this survey jumps around erratically - but has been relatively steady for the last year. Key internals in the report marginally improved so I would consider this a better report than last month.

  • Expectations from Bloomberg / Econoday were for a reading between 13.0 to 18.0 (consensus 17.5) versus the 13.1 reported. Any value above zero shows expansion for the New York area manufacturers.
  • New orders subindex of the Empire State Manufacturing improved and remains in expansion, whilst the unfilled orders sub-index improved and remains in expansion..
  • This noisy index has moved from +18.2 (February 2017), +16.4 (March), +5.2 (April), -1.0 (May), 19.8 (June), 9.8 (July), 25.2 (August), 24.4 (September), 30.2 (October), 19.4 (November), 18.0 (December), 17.7 (January 2018) - and now 13.1.

As this index is very noisy, it is hard to understand what these massive moves up or down mean - however this regional manufacturing survey is normally one of the more pessimistic.

Econintersect reminds you that this is a survey (a quantification of opinion). Please see caveats at the end of this post. However, sometimes it is better not to look to deeply into the details of a noisy survey as just the overview is all you need to know.

From the report:

Business activity continued to expand in New York State, according to firms responding to the February 2018 Empire State Manufacturing Survey. The headline general business conditions index fell five points to 13.1, suggesting a somewhat slower pace of growth than in January. The new orders index and the shipments index were little changed, and indicated ongoing growth in orders and shipments. Unfilled orders increased slightly, and delivery times lengthened. Labor market conditions pointed to a modest increase in employment and hours worked. Input price increases picked up noticeably, with the prices paid index reaching its highest level in several years. Firms remained very optimistic about future business conditions, and capital spending plans continued to be robust.

Growth Continues

Manufacturing firms in New York State reported that business activity continued to expand, though at a somewhat slower pace than last month. The general business conditions index moved down five points to 13.1. Thirty-seven percent of respondents reported that conditions had improved over the month, while 24 percent reported that conditions had worsened. The new orders index was little changed at 13.5, and the shipments index was also little changed at 12.5—readings that indicated ongoing growth in orders and shipments. The unfilled orders index remained positive for a second consecutive month, reflecting a small increase in unfilled orders. The delivery time index rose eight points to 11.1, a sign that delivery times lengthened. The inventories index declined but remained positive at 4.9, suggesting that inventory levels edged higher.

Input Price Increases Pick Up

The index for number of employees rose to 10.9, signaling a modest increase in employment levels, and the average workweek index rose to 4.6, indicating that hours worked also climbed. Input price increases were noticeably higher. The prices paid index climbed twelve points to 48.6, its highest level in nearly six years. The prices received index held steady at 21.5, a level pointing to continued moderate selling price increases.

Firms Remain Optimistic about Future Conditions

Looking ahead, firms continued to be optimistic about the six-month outlook. The index for future business conditions edged up two points to 50.5. The index for future delivery times reached a record high of 15.3, indicating that firms expected longer delivery times in the months ahead. The index for future prices paid stayed close to last month's multiyear high, and the capital expenditures index, at 31.9, showed that firms' capital spending plans remained strong.

z empire1.PNG

The above graphic shows that when the index is in negative territory that it is not a signal of a recession - of 10 times in negative territory (since the Great Recession) - no recession occurred. Conversely, a positive number is likely to be indicating economic expansion. Historically, when it does make a correct negative prediction it can be timely - this index was only two months late in going negative after what was eventually determined to be the start of the 2007 recession.

This survey has a lot extra bells and whistles which take attention away from the core questions: (1) are orders and (2) are unfilled orders (backlog) improving?.

z empire2.PNG

Unfilled order contraction can be a signal for a recession.

Summary of all Federal Reserve Districts Manufacturing:

Richmond Fed (hyperlink to reports):

z richmond_man.PNG

Kansas Fed (hyperlink to reports):

z kansas_man.PNG

Dallas Fed (hyperlink to reports):

z dallas_man.PNG

Philly Fed (hyperlink to reports):

z philly fed1.PNG

New York Fed (hyperlink to reports):

z empire1.PNG

Federal Reserve Industrial Production - Actual Data (hyperlink to report):

Holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (lighter blue bar) to the Dallas Fed survey (light blue bar).

In the above graphic, hard data is the long bars, and surveys are the short bars. The arrows on the left side are the key to growth or contraction.

Caveats on the use of Empire State Manufacturing Survey:

This is a survey, a quantification of opinion - not facts and data. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions. Econintersect finds they do not necessarily end up being consistent compared to hard economic data that comes later, and can miss economic turning points.

According to Bloomberg:

The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead.

This Empire State Survey is very noisy - and has shown recessionary conditions throughout the second half of 2011 - and no recession resulted. Overall, since the end of the 2007 recession - this index has indicated two false recession warnings.

No survey is accurate in projecting employment - and the Empire State Manufacturing Survey is no exception. Although there are some general correlation in trends, month-to-month movements have not correlated with the BLS Service Sector Employment data.

Over time, there is a general correlation with real manufacturing data - but month-to-month conflicts are frequent.

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