The October 2015 Business Leaders Survey of regional service firms, released today, paints a considerably more benign picture of local business conditions than the more troubling October 2015 Empire State Manufacturing Survey, released yesterday. The two surveys point to diverging trends in the regional economy: manufacturing firms report that business activity has weakened, on balance, for the third month in a row, while regional service firms, though far from euphoric, remain slightly positive, on balance, about business trends. One of the reasons for this divergence seems to be the strong dollar, which has had negative effects on far more manufacturers than service firms, according to our surveys.
The Empire State Manufacturing Survey has been giving signals of weakness for the past several months. The headline index hovered around zero—the breakeven level at which the same number of firms characterize activity as increasing as declining—from April through July, and then tumbled to below -10 from August through October. The last time the survey’s headline index remained this negative for this long was during the deepest part of the Great Recession, from the fall of 2008 to the spring of 2009. This would be a worrisome sign indeed if it were matched by comparable negativity in the service sector—as was the case in 2008 and 2009. However, over the last three months, the headline index from the service sector survey has remained at least slightly above zero, marking the most sustained divergence between the two surveys in this direction since they have both been in the field (beginning in 2005). And it’s not just the headline indexes that are giving opposing signals. For instance, both surveys ask panelists about recent changes in employment at their firms, and while nearly twice as many manufacturers said they scaled back than increased employment in the October survey, the opposite is true for service firms, where nearly twice as many are increasing as reducing employment. Other indicators in the two surveys are also showing a similar divergence.
Why have manufacturers been faring so much worse than service firms lately? One important factor seems to be the strong U.S. dollar. This month’s Supplemental Survey on the effects of exchange rates on business activity reveals that the strong dollar over the past year has had some adverse effects on service firms, but it has had much more widespread negative effects on manufacturers. For example, the weaker Canadian dollar had at least some effect on business for 28 percent of service sector firms, but for 55 percent of manufacturers. There were similar differences for other currencies. Moreover, 31 percent of manufacturers said the strengthening U.S. dollar was adversely affecting profits, while just 17 percent of service sector panelists reported such negative effects. Looking ahead to the next year, the difference is just as stark: 29 percent of manufacturers expect exchange rates to adversely affect profits, compared with 14 percent of service sector firms.
These results may not be too surprising: not only do manufacturers tend to derive more of their business from foreign customers than do service firms, but manufacturing exports seem to be more sensitive to changes in foreign exchange rates than services exports. Back in January, when we last asked about exchange rate effects in our surveys, manufacturers reported that 14 percent of their revenues, on average, came from exports, while service firms said that only 8 percent of their revenues were derived from foreign customers. When asked again this month, the figure for service firms remained at 8 percent, but the average export share among manufacturers has fallen to just 10 percent. This decline suggests that manufacturers have seen a fairly marked decline in business from foreign customers this year, while service firms haven’t. All in all, while the recent weak manufacturing survey reports are concerning, the service sector appears to be holding up, although both sectors appear to be facing the headwinds of a strong dollar.
The views expressed in this post are those of the authors 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 authors.
Jason Bram is a research officer in the Federal Reserve Bank of New York’s Research and Statistics Group.
Richard Deitz is an assistant vice president in the Bank’s Research and Statistics Group.