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posted on 15 July 2015

July 2015 Empire State Manufacturing Index Squeaks Into Expansion

Written by Steven Hansen

The Empire State Manufacturing Survey improved enough to squeak into expansion. Key internals are in contraction.

  • Expectations were for a reading between -0.5 and 6.0 (consensus 3.5) versus the 3.9 reported. Any value above zero shows expansion for the New York area manufacturers.
  • New orders sub-index of the Empire State Manufacturing Survey has been very weak for the last 8 months and remains in contraction, whilst unfilled orders worsened and remains in contraction.
  • This noisy index has moved from +25.6 (July 2014), +14.7 (August), +27.5 (September), +6.2 (October), +10.2 (November), -3.6 (December), +10.0 (January 2015), +7.8 (February), +6.9 (March), -1.2 (April), +3.1 (May), -2.1 (June) - and now 3.9.

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:

The July 2015 Empire State Manufacturing Survey indicates that business conditions improved slightly for New York manufacturers. The headline general business conditions index climbed six points to 3.9. The new orders index was little changed at -3.5, a sign that orders continued to decline, and the shipments index fell four points to 7.9. Labor market indicators signaled a small increase in employment levels and the average workweek. Price indexes pointed to modest increases in both input prices and selling prices, with the prices paid index reaching its lowest level in three years. Indexes for the six-month outlook suggested that optimism about future business conditions was slightly higher than in June, but in line with the trend over the past six months, expectations for improvement remained subdued.

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 7 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? Econintersect emphasizes these two survey points - and both remain in contraction.

Respondents believe the level of unfilled orders (backlog) is has been negative since 2011. Unfilled order contraction can be a signal for a recession - and remains contraction this month.

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).

Comparing Surveys to Hard Data:

z survey1.png

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 Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001. Each month, new data will be released and the previous month's data will be revised slightly. Once per year, all data will undergo a benchmark revision.

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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