Jason Bram and Richard Deitz
The July Empire State Manufacturing Survey, published today, indicates that manufacturing conditions continued to weaken in New York State. The survey’s headline index was -3.8, the second negative reading in a row, and suggested that, overall, manufacturing activity declined slightly in New York. Because the survey is a diffusion index, readings below zero indicate that more respondents reported worsening conditions than improving conditions. Lower (or higher) values of the index indicate more widespread decline (or improvement). The Empire State Manufacturing Survey is the first available indicator of manufacturing activity for the month. While it is entirely possible that what we are seeing is idiosyncratic to New York State, July’s report raises questions about whether the manufacturing sector is experiencing a temporary bump in the road, or is headed toward a more sustained slowdown. In this post, we review some of the highlights of today’s report.
For most of the past two years, the survey has signaled strength in New York State’s manufacturing sector. The headline index has now been below zero for two consecutive months, suggesting that activity has stopped expanding and may have contracted modestly. In contrast, the nationwide manufacturing index published by the Institute of Supply Management (ISM) ticked up in June after signaling a sharp slowdown in growth in May, presumably owing in large part to supply disruptions from Japan’s earthquake. (Note: National industrial production data for June will be released by the Federal Reserve Board of Governors later this morning, while July data will not be available until mid-August.)
Besides the headline index, the survey’s other business indicators are also somewhat disappointing. The new orders index remained slightly negative, suggesting that the pipeline of demand is not growing. The shipments index and the index for number of employees hovered just above zero, and the average workweek index dropped well below zero. On the pricing front, although survey respondents reported that both input prices and selling prices rose, the pace of increase slowed. This is the second consecutive month that these indexes have indicated decelerating prices.
Supplemental questions, which spotlight different topics each month, focused on capital spending plans. On balance, firms indicated that they are spending more this year than in 2010 on computer and other capital equipment, but are investing less in structures. In addition, the median firm plans to spend about 14 percent less overall on capital this year than last.
The survey also asks respondents to gauge expected activity over the next six months. These forward-looking indicators suggest that activity is expected to improve in the months ahead, but the level of optimism has fallen markedly from the first half of the year.
All in all, July’s report is not very encouraging. However, it remains to be seen whether the manufacturing sector is facing a temporary lull, or encountering significant and persistent headwinds. It will be particularly important to monitor other July manufacturing data over the next couple of weeks, including regional manufacturing surveys from the Federal Reserve Banks of Philadelphia, Dallas, Kansas City, and Richmond, as well as the ISM’s national manufacturing survey.
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).