The Empire Is Tarnished
Here is a continued problem. Despite the recent calls of bullishness based on a one month retail sales number, which we will discuss in an upcoming blog in more detail, our COMPOSITE indicator of both current and future business conditions in the New York manufacturing region continued to contract for the fifth month in a row. The Empire State index for October showed little change at minus 8.48 vs September's minus 8.82. While there was a positive gain in current New Orders, it was more than offset by the decline in future New Orders. The small uptick in October for New Orders followed two months of declines and reflected temporary inventory restocking. Future plans for both business investment and technology spending also declined which doesn't bode well for the future economic outlook either.
Unfilled orders, at minus 4.49, are contracting for the fourth month in a row. Backlogs are crucially important for the outlook on economic strength. The recent upticks in production in the month of September which got the mainstream media all "bully eyed" are missing the fact that manufacturers, not just in the NY region but all over, have been keeping shipments and employment up by working down backlogs. However, that is becoming an increasingly thin strategy to hang hopes on. Eventually when backlogs are worked through the wheels come off that cart if there is not a rush of new orders to take over. Without a significant push by the Fed this is unlikely to happen.
Inventories, at minus 8.99, are contracting for the fourth month in a row suggesting that the region's manufacturers, hit by weakness in new orders, see their inventories as too high. Delivery times, at minus 1.12, have been getting a bit shorter hinting at over capacity in the shipping sector as truck and rail firms chase fewer and fewer orders.
Another negative is the six-month outlook which at 6.74 is down from 13.04 in the prior month and is at a new low for the recovery. This echoes other readings on sentiment, including those on consumer sentiment, that spirits are unusually depressed. Most likely we will see additional weakness in the Philly Fed index out later this week as well.
All in all this is not a good report and does not bode well for strong economic recovery through the end of the year. We maintain our outlook of sub-2% growth through the end of the year. Our view of an outright economic contraction by 2nd quarter of 2012 as the government "goodies" of payroll tax cuts and other credits, along with the "Bush Era Tax Cuts", come to an end remain in tact unless those incentives are renewed.