Empire Composite Index Signals Economic Contraction
This mornings release of the manufacturing activity in the New York region showed a rapid, and surprise (of course), drop in the index to contradictory levels of -7.8 in the June period from 11.9 in May. While this is the current business conditions index the more troubling indication was that the future business conditions index plummeted by more than 57% last month from a May reading of 52.69 to 22.45.
While the weakness in current business conditions may be explained away and dismissed as a "soft patch" the decline in the future expectations is much more troubling and is more indicative that the current "slow down" is more than that. As we have discussed in our missives in the past - it is not the current number of any economic indicator that is important it is the trend of those numbers. For example, if a car is moving at a high rate and slams on the breaks, the car will continue its forward momentum for a while before it comes to a full stop. The same is the case here. The economy got a boost on the production side of the ledger from a variety of stimulus programs that led to a large increase in inventory restocking. This was shown in the releases of the GDP reports over the last 6 quarters that have been supported to a very large degree, around 2/3rds, by inventory building. However, without the translation to the consumption side, which has remained very weak, the impact of those stimulus injections are now fading.
With our composite index of business conditions now falling to levels that are more normally recessionary it is a cause for much greater concern than the economy is just hitting a "soft patch". Soft patches in an economy are very rare and just as economist were predicting in early 2008 that we were headed for just a "slow down" in the economy - all indications were telling you it would be much worse.