Manufacturing Sector Faltering - NY & Philly Fed Reports
Sole Solid Sector Sinks
Wall Street Greek told you so again! Long time readers have come to trust in our insight. Over the past few months or so we have been warning that the recent keystone of American economic expansion, manufacturing, was faltering. Just two weeks ago we reminded subscribers again in our article, "Economic Recession Returneth!" We received further confirmation of this downturn in manufacturing this morning, as the New York and Philly Fed Surveys both showed sharp drop-off in the pace of manufacturing growth.
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As Bloomberg Radio spoke of the shocking developments in the manufacturing sector, we could not help but feel mute. Hadn't anybody heard us? It seems that over the past few years, we have been distinctly prescient time and again, but have you noticed? We do not include Bloomberg Radio in the group of deaf ears to Wall Street Greek, since Tom Keene has quoted us on air on more than one occasion, and we hear he is a fan. However, the group of economists who were looking for an Empire State Survey reading of 18.0 and instead found 5.1, might consider subscribing to The Greek.
Empire State Manufacturing Survey
The New York Federal Reserve posted its monthly report on manufacturing Thursday. Its General Business Conditions Index dropped precipitously 15 points, to 5.1. The reading still signifies economic expansion, but represents a slower pace of growth. This is the same slowing before the reversal that we discussed earlier this month and in months passed. Before you stop and back up, you slow down, and the behemoth American economy and its manufacturing sector are only more likely to follow this route.
Nearly an equal amount of survey respondents noted conditions improved (27%) in July, versus those who noted deterioration (22%), so expansion is clearly in question. Both shipments and new orders rose less robustly this month. The New Orders Index, which I view most critical, fell 7 points to 10.1. The Shipments measure dropped 13 points, to 6.3. Especially troubling, the Unfilled Orders Index declined 15 points, to -15.9. I do not expect unfilled orders is down due to manufacturers' inability to keep pace, but instead due to collapsing demand. Inventories are up also, with that index rising to 6.4 from near zero. I do not see this as good news either...
The index measuring employment fell for the second month in a row, declining 10 points to 12.4 in June, and to 7.9 in July. More bad news: the average workweek dropped 18 points into negative territory at -9.5. Keep in mind that the auto industry does some retooling around this time of year, and this might be playing a role worth noting. Otherwise, if the workweek is decreasing, new layoffs might be around the corner as well. Perhaps offering warning of such, the Future Employment Indexes "were noticeably lower," according to the report.
The Capital Expenditures Index dropped for the second month in a row, falling 14 points to 14.3. FYI, that marked the lowest point in over a year. Those of you excited by Intel's EPS report yesterday might read my analysis of the topic published that same day; and also take note that this survey's Technology Spending Index also hit a low of more than a year, down to 4.8.
We also found reason for worry in the fact that respondents are talking about an increasing importance of exports. Hmm, might this be due to a dry domestic environment? My general take on the report is that manufacturing managers are hopeful, or in denial, with regard to the next six months. That said, early signs of trouble are present in their responses. Investors in the manufacturing sector might be wise to take profits off recent gains in shares.
Philly Fed Survey
Economists expected the Philadelphia Federal Reserve's General Business Conditions Index to come in at 12.0 in July, but instead found 5.1. It was the same surprise discovered in the New York outlook.
Philly reported mostly the same information as New York, except for better employment results and worse new order activity. The New Orders Index fell 13 points to its first negative reading in 12 months. In Philly, like New York, managers seem to be living in a state of denial that may be the result of what they hear on television (from gurus and policy makers). The Future General Activity Index fell 15 points, but kept in positive territory at a level of 25.0.
It's my opinion that the direction of change matters more than the absolute activity reported here. Also, it should be clear that future expectations are somewhat tied to recent success, and may be missing more relevant factors like restocked inventory levels and still absent real demand. This is just another bit of evidence supporting our warning for double-dip recession, or at least long-lasting stagnation for this employment burdened economy.
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