Empire Manufacturing Index: Do Not Look Inside
The June release of the New York Federal Reserve regional manufacturing survey posted a much improved print of 7.84 from a negative May reading of -1.43. However, much like "Pandora's box" what you see on the outside and what is inside are two terribly different things. I have compiled a month over month chart of all the current sub-indexes for the survey from May to June which all point to a contraction underway in the region's manufacturing sector.
Econoday did an unusually good summary on the survey stating:
"New orders, at minus 6.69, are down for a second straight month with contraction in backlog orders very deep, at minus 14.52. Shipments are at minus 11.77 with inventories at minus 11.29 in what are also deep rates of monthly contraction. These readings extend what is a very soft run for data out of the manufacturing sector, a run that will support the doves at the Fed.
The headline for the Empire State report, as it is for the Philly Fed report, is not the sum of components, but rather a single reading from a single subjective question on general month-to-month conditions."
While it is a positive that that a number of the respondents were this month, as well as on their outlook six-months forward, it is important to remember that this is a sentiment survey. Sentiment survey's are heavily influenced by current conditions which will change overtime. The problem in the current report is that even thought manufacturer's are "optimistic" currently - the weakness in the underlying data is likely to weigh on that outlook in the reports to come.
The chart below shows what the regions 6-month outlook was in December of 2012 as compared to their current conditions as of June. How accurate was their forecast of conditions six months ago as compared to how they fell today?
As you can see the current conditions that manufacturers are reporting today are markedly weaker than they thought it would be 6-months ago. With expectations by economists for a strong economic rebound through the end of 2013 being a primary support underneath current stock market valuations; the weakness in both the current survey and future outlook doesn't provide much support.
The good news is that the weakness in this report, along with a variety of other data, is likely to keep the Fed engaged for a while longer with the current liquidity programs.
As I stated in recently in "The Economy In Pictures":
"If you are expecting economic recovery and a continuation of the bull market then economic data must begin to improve markedly in the months ahead. If not, the drag of economic growth will ultimately continue to erode corporate earnings, profitability and weigh on the financial markets.
For the Federal Reserve these charts do make it clear that despite continued monetary interventions are not healing the economy but simply keeping it afloat by dragging forward future consumption. The problem is that it leaves a void in the future that must be filled.
In my opinion the economy is far to weak to stand on its own two feet. Therefore, while the Fed may ease off on the current rate of bond purchases, likely not before September, it is highly unlikely that they will remove their 'highly accommodative stance' anytime soon."