March 2018 Empire State Manufacturing Index Improves

Written by Steven Hansen

The Empire State Manufacturing Survey improved and remains in expansion. It was well above expectations.

• Expectations from Bloomberg / Econoday were for a reading between 10.2 to 16.0 (consensus 14.6) versus the 22.5 reported. Any value above zero shows expansion for the New York area manufacturers.
• New orders subindex of the Empire State Manufacturing improved and remains in expansion, whilst the unfilled orders sub-index improved and remains in expansion..
• This noisy index has moved from +16.4 (March 2017), +5.2 (April), -1.0 (May), 19.8 (June), 9.8 (July), 25.2 (August), 24.4 (September), 30.2 (October), 19.4 (November), 18.0 (December), 17.7 (January 2018), 13.1 (February) – and now 22.5.

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 more 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:

Business activity grew robustly in New York State, according to firms responding to the March 2018 Empire State Manufacturing Survey. The headline general business conditions index climbed nine points to 22.5. The new orders index rose to 16.8 and the shipments index advanced to 27.0—readings that pointed to strong growth in orders and shipments. Unfilled orders increased, delivery times lengthened, and inventories edged higher. Labor market indicators showed an increase in employment and hours worked. After reaching a multiyear high last month, the prices paid index moved up further, reflecting ongoing and widespread increases in input prices. The prices received index held steady and suggested moderate selling price increases. Firms remained optimistic about future business conditions, though less so than last month, and capital spending plans remained strong.

GROWTH PICKS UP

Manufacturing firms in New York State reported that business activity continued to expand, and at a faster clip than in February. The general business conditions index rose nine points to 22.5. Thirty-eight percent of respondents reported that conditions had improved over the month, while 15 percent reported that conditions had worsened. The new orders index and the shipments index both showed solid growth, with the first index moving up three points to 16.8 and the second climbing fifteen points to 27.0. The unfilled orders index, positive for a third consecutive month, advanced eight points to 12.7, pointing to an ongoing rise in unfilled orders. The delivery time index rose five points to 16.2, a sign that delivery times continued to lengthen. The inventories index was little changed at 5.6, suggesting that inventory levels edged higher.

INPUT PRICES CONTINUE TO ACCELERATE

The index for number of employees held steady at 9.4 and the average workweek index was little changed at 5.9—readings that together signaled another month of increasing employment levels and hours worked. Input price increases continued to accelerate: the prices paid index edged up to 50.3, setting a new multiyear high. The prices received index held steady at 22.4, a level pointing to ongoing moderate selling price increases.

FIRMS REMAIN OPTIMISTIC

Looking ahead, firms continued to be optimistic about the six-month outlook, though somewhat less so than last month. The index for future business conditions fell six points to 44.1. Unfilled orders were expected to increase, and inventories were expected to move higher. The index for future prices paid reached its highest level in several years, indicating a widespread expectation that input prices would increase in the months ahead. The capital expenditures index, at 29.4, suggested that firms’ capital spending plans remained strong.

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The above graphic shows that when the index is in negative territory that it is not a signal of a recession – of 10 times in negative territory (since the Great Recession) – no recession occurred. Conversely, a positive number is likely to be indicating economic expansion. Historically, 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?.

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Unfilled order contraction can be a signal for a recession.

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):

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 Dallas Fed survey (light blue bar).

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.

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 New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead.

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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