June 2014 Empire State Survey Marginally Improves

Written by Steven Hansen

The Empire State Manufacturing Survey improved marginally, and continues in expansion territory in June 2014. Key internals were mixed.

• Expectations were for a reading between 12.0 and 17.0 (consensus 15.0) versus the 19.3 reported. Any value above zero shows expansion for the New York area manufacturers.
• New orders sub-index of the Empire State Manufacturing Survey remains in expansion territory, whilst unfilled orders was statistically unchanged and remains slightly in contraction.
• This noisy index has moved from 7.8 (June 2013), 9.5 (July), 8.2 (August), 6.3 (September), 1.5 (October), -2.2 (November), +1.0 (December), +12.5 (January 2014), +4.5 (February), +5.6 (March), +1.3 (April), +19.0 (May) – and now +19.3.

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 most 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 June 2014 Empire State Manufacturing Survey indicates that business conditions improved significantly for a second consecutive month for New York manufacturers. The headline general business conditions index was 19.3, a reading nearly identical to last month’s multiyear high. The new orders index climbed eight points to 18.4, its highest level in four years, and the shipments index inched down to 14.2. The unfilled orders index held steady at a level close to zero. The indexes for both prices paid and prices received were slightly lower, indicating a slowing in the pace of price increases. Labor market conditions continued to improve, with indexes pointing to a modest increase in employment levels and hours worked. Indexes for the six-month outlook remained highly optimistic, with the future new orders and shipments indexes recording notable gains.

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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 trending up (looking at a 3 month rolling average) it has been negative since 2011. Unfilled order contraction can be a signal for a recession.

Holding this and other surveys Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (long dark blue bar) and US Census manufacturing shipments (long pink bar) to the Empire State Survey (short darker green bar).

Comparing Surveys to Hard Data

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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):

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Kansas Fed (hyperlink to reports):

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Dallas Fed (hyperlink to reports):

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Philly Fed (hyperlink to reports):

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New York Fed (hyperlink to reports):

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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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