Empire State Survey Improves in July 2012, Internals Ugly

Written by Steven Hansen

The Empire State Manufacturing Survey (manufacturing in New York State) in July 2012 continued its eighth month of expansion – increasing modestly from a bad report last month.  Manufacturing expansion is indicated by positive numbers to this index:

  • This noisy index has moved from 20.2 (March) to 6.6 (April) to 17.1 (May) to a barely positive 2.3 (June) – and now a marginally better 7.4 in July.
  • Expectation was for a readings of 0.0 to 3.8
  • HOWEVER, new orders contracted to a reading of -2.7, and unfilled orders shows much more contraction at -13.6

As this index is very noisy, it is hard to understand what these massive moves up or down mean.

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 Empire State Manufacturing Survey indicates that manufacturing activity expanded modestly over the month. The general business conditions index rose five points to 7.4. New orders, however, declined, as that index slipped into negative territory for the first time since November 2011, falling five points to -2.7. The shipments index increased five points to 10.3, indicating a rise in shipments. The prices paid index declined for a fourth consecutive month, dropping twelve points to 7.4, its lowest level since mid-2009. The prices received index inched up three points to 3.7. Employment levels climbed higher, with the employment index rising six points to 18.5, while the average workweek index fell three points to zero. Future indexes were generally positive, but many continued to drift downward and suggested that the level of optimism about future conditions remains below the level earlier this year.

The above graphic shows that when the index is in negative territory that is not a signal of a recession: of 5 times in negative territory only one occurred with a recession. Conversely, a positive number is likely to be indicating economic expansion. However, 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.

There is a high probability that the economy is expanding based on this index.

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.

Respondents do not believe the level of unfilled orders (backlog) is increasing; it has been negative all 2011 (and now into 2012). Unfilled order contraction can be a signal for a recession, but new order contraction is a far more ominous sign.

Survey respondents were also asked if they had recently modified their production plans for the second half of 2012.

Responses were fairly evenly split, with slightly more indicating that they had ramped up rather than scaled back production plans—26 percent versus 22 percent. This reflects a bit more optimism than at this time last year, when downward revisions in production plans outnumbered upward revisions by a small margin. To put this in context, in July 2009, around the trough of the recession, an extraordinary 63 percent of those surveyed said they had cut back production plans.

However, the current Empire Survey value overall is above levels associated with past recessions. It is likely looking too closely at the detail may be counterproductive. However, 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 Empire State Survey (green bar).

Comparing Surveys to Hard Data

/images/z survey1.png

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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