Empire State Survey Shows Manufacturing Contraction in August 2012

Written by Steven Hansen

The Empire State Manufacturing Survey (manufacturing in New York State) in August 2012 shows manufacturing contraction after eight months of expansion. Manufacturing expansion is indicated by positive numbers in 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) to a marginally better 7.4 in July – and now a -5.9.
  • Expectation was for a readings of 5.0
  • New orders contracted to a reading of -5.5, and unfilled orders shows much more contraction at -10.6

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 August Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated over the month. The general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. At -5.5, the new orders index was below zero for a second consecutive month, and the shipments index fell six points to 4.1. The prices paid index climbed nine points to 16.5, pointing to a pickup in the pace of increase in input prices, while the prices received index hovered just above zero for a third consecutive month. The index for number of employees inched lower, but remained positive at 16.5, suggesting a moderate increase in employment levels, and the average workweek index rose to 3.5. Indexes for the six-month outlook were generally positive but lower than in July, indicating that respondents expected business conditions to improve little in the months ahead.

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.

The negative numbers this month indicate there may be an increased chance that we are approaching a recession.  However, don’t forget that this behavior has given false signals in the past.

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 plans for the second half of 2012.

In a series of supplementary questions to the August 2012 Empire State Manufacturing Survey, manufacturers were asked if they had modified their actual year-to-date hiring and capital spending since the beginning of 2012 and if they were planning revisions for the second half of this year. Respondents were also asked about the extent to which various factors contributed positively or negatively to revisions in hiring and capital spending plans for the second half of 2012.

With regard to actual hiring and capital spending year-todate, slightly more firms reported making downward than upward modifications, relative to what they had been planning at the beginning of the year. Moreover, considerably more fi rms (roughly twice as many) reported making downward than upward revisions to their hiring and capital spending plans for the second half of 2012.

By far the most widely cited factor behind the downward revisions — for both hiring plans and capital spending plans — was increasing uncertainty about business prospects. Indeed, more than half of all respondents saw uncertainty as a negative infl uence. More than 30 percent of respondents cited sales running below plan as a factor dampening both hiring and capital spending. A sizable number of manufacturers (28 percent) also reported that increased diffi culty in finding qualifi ed job applicants adversely affected hiring. Only a handful of manufacturers cited reduced access to credit as a negative influence on capital spending plans.

As for positive influences on hiring and capital spending, the most widely cited factor was higher than expected sales; 37 percent of respondents noted this as a factor supporting increased hiring, while a little more than 30 percent identified it as a factor supporting higher capital spending. Only about 10 percent of respondents cited decreasing uncertainty about business prospects as a positive influence on hiring and capital spending plans.

It is likely that looking too closely at the detail of this survey may be counterproductive. 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

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.

Summary of all Federal Reserve Districts Manufacturing:

Richmond Fed (hyperlink to reports):

/images/z richmond_man.PNG

Kansas Fed (hyperlink to reports):

/images/z kansas_man.PNG

Dallas Fed (hyperlink to reports):

/images/z dallas_man.PNG

Philly Fed (hyperlink to reports):

/images/z philly fed1.PNG

New York Fed (hyperlink to reports):

/images/z empire1.PNG

Federal Reserve Industrial Production – Actual Data (hyperlink to report)

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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