Empire State Survey Very Negative in September 2012

Written by Steven Hansen

[Note: This post is late as the New York Fed did not publicly post until 45 minutes after the scheduled post time – even though major media obviously had access to this report.  Just one more reminder that being big has advantages in the good ‘ole USA]

The Empire State Manufacturing Survey (manufacturing in New York State) in September 2012 shows manufacturing contraction continues to be forecast for a second month after the previous eight months of expansion.  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 (July) to a -5.9 (August) – and now has slid to a much more negative -10.4.
  • Expectation was for a readings of -3.0
  • New orders contracted to a seriously terrible reading of -14.03, and unfilled orders shows more contraction at -14.89

As this index is very noisy, it is hard to understand what these massive moves up or down mean – however many surveys now are in negative territory.

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 September Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to weaken. The general business conditions index slipped another fi ve points to -10.4, its second consecutive negative reading. The new orders index fell nine points to -14.0, its third straight negative reading.  Both of these measures reached their lowest levels in almost two years. The shipments index was little changed at 2.8. The prices paid index edged up to 19.2, suggesting moderate increases in input prices, while the prices received index hovered a little above zero for a fourth consecutive month. The index for number of employees fell noticeably but remained just above zero at 4.3, suggesting a slower pace of hiring activity than in recent months. The average workweek index remained near zero. By contrast, indexes for the six-month outlook were mostly steady to somewhat higher than in August, suggesting modestly  optimism about business conditions in the months ahead..

/images/z empire1.PNG

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, 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 about their pricing.

In a series of supplementary questions to the September Empire State Manufacturing Survey, manufacturers were asked how much their overall selling prices had changed over the past year and how much they expected their prices to rise or fall in the future. In addition, they were asked to assess the probability that prices would rise or fall by certain specifi ed amounts. Identical questions had been asked in surveys conducted in September 2011 and earlier.

Respondents reported that their selling prices had risen 0.8 percent, on average, during the past twelve months (see table). In last September’s parallel survey, the average respondent indicated that prices had risen 1.4 percent.

Looking ahead to the next twelve months, the average respondent in the current survey predicted a 1.7 percent rise in selling prices — somewhat faster growth than the 1.0 percent increase projected in last year’s survey. Roughly 55 percent of respondents—a slightly higher share than in last year’s survey — planned to hike prices at least 2 percent. The share of respondents expecting to lower prices was just 8 percent, down from 13 percent in last year’s survey.

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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