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January 2013 Empire State Survey Continues to Signal Contraction

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The Empire State Manufacturing Survey (manufacturing in New York State) in January 2013 shows manufacturing contraction continues to be forecast for a sixth month in a row. Expansion is indicated by positive numbers in this index.

  • This noisy index has moved from 20.2 (March), 6.6 (April), 17.1 (May), 2.3 (June), 7.4 (July), -5.9 (August), -10.4 (September), -6.2 (October), -5.2 (November), -8.1 (December) – and now  -7.8  (January).
  • Expectation was for a reading of 0.0 to 2.0 versus the -7.8 reported
  • New orders and unfilled orders also were contracting – not a good sign.

As this index is very noisy, it is hard to understand what these massive moves up or down mean – however this survey continues to be more negative than the rest.

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 January 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a sixth consecutive month and, at -7.8, was little changed from its recent readings.

The new orders index fell four points to -7.2, and the shipments index declined a full fi fteen points to -3.1. Price increases picked up, with the prices paid index rising six points to 22.6 and the prices received index rising ten points to 10.8, the highest readings for both of these indexes in several months.

Labor market conditions remained weak, with the indexes for both the number of employees and the average workweek remaining below zero for a fourth month in a row. The level of optimism about the six-month outlook rose somewhat from December, but remained low compared with levels in early 2012. Significantly, the capital expenditures index fell to 4.3, its lowest reading since 2009.

/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.

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 believe the level of unfilled orders (backlog) is declining; it has been negative all 2011 and 2012 (and now into 2013). Unfilled order contraction can be a signal for a recession, but new order continued contraction is a far more ominous sign.

It is likely that looking too closely at the detail of this survey may be counterproductive. Holding this and other surveys 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 (darker 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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