Empire Manufacturing Survey Takes a Step Back

By Rom Badilla

The New York Federal Reserve released the results of its monthly manufacturing survey, which suggests slowing activity for the region. The Empire Manufacturing survey, which covers 175 companies and provides an economic backdrop for the New York region, fell to a reading of 4.10 in September from 7.10 in the previous month. The fall in September disappointed market expectations as the average forecast was at 8.00 according to Bloomberg surveys. A reading above zero suggests manufacturing is expanding. After improving to a recent high of 31.86 in April 2010 from deep negative territory during the recession, the survey has fallen to single digits and has remained there for the past three months.

Behind the headline numbers, the components are a little less grim. The New Orders component crossed back into expansionary territory by improving to 4.33 from -2.71 in August. Inventories declined slightly from 2.86 in the prior period to 1.49. Shipments, which fell off of a cliff to -11.50 in August, rebounded to -0.27 in September.

On the inflation front, price pressures remain subdued which should keep Treasury yields relatively low in the short term. The Prices Paid component improved slightly to 22.39 from 20.00. While higher for the month and similar to the headline number, the Prices Paid component has fallen from recent highs of 44.74 set in the spring of 2010. Since then, the index has averaged 23.74 in the last four months. Prices Received rebounded as well back into expansionary territory from -2.86 to 1.49.

Industrial production activity remains relatively low, which suggests more evidence that the economy is cooling. The Federal Reserve reported that Industrial Production in August increased by only 0.2% after the previous month’s number was revised downward by four-tenths of a percent to 0.6%. The August reading, which was in-line with economists’ surveys, reflected a slowdown in the production of motor vehicles and parts, which spiked in the prior month. In addition, Capacity Utilization, which provides an estimate of how much factory capacity is in use and may provide insight on inflationary pressures, continues to mire in below average territory. Capacity Utilization for August came in at 74.7, an increase of only a tenth of a percent from the prior month. Economists were expecting a reading of 75.0. Comparatively, Capacity Utilization averaged 80.4 percent in the three months prior to the onset of the recession.

Given the recent backup in interest rates, mortgage applications declined according to the Mortgage Bankers Association. Mortgage applications for the week ending September 10, declined 8.9% to an index level of 801.5. Since reaching a high of 893.8 at the tail end of August, the index has declined by more than 10%, which coincides with the run up in interest rates.

Currently, market reaction, as evident by changes in the major benchmarks, is rather subdued given the economic data. The 10-Year is flat at 2.68% while the S&P 500 is higher by 0.2%. Interestingly, the 2-Year, which is more responsive to the overall macro economic picture, is trading at 0.47% , a decline of 3 basis points from the previous close and within a basis point of touching its recent lows set on August 24.

Disclosure: None