Empire Manufacturing Index
The Empire Manufacturing Index took a huge plunge in past month which is most likely attributable to surging prices. In fact the current level of prices paid by manufacturers in the Empire region are at levels not seen since the peak of the markets/economy in 2008. However, you have to love government reporting as they put a positive spin on an abysmal report:
"The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in May, but at a slower pace than in April. The general business conditions index fell ten points to 11.9. The new orders index declined five points to 17.2, and the shipments index slipped three points to 25.8. The inventories index climbed to 10.8, its highest level in a year. The prices paid index rose to 69.9, its highest level since mid-2008, while the prices received index held firm at 28.0. Future indexes continued to convey a high level of optimism about the six-month outlook, although prices are widely expected to rise."
Okay, let's think about that for a minute. Conditions for NY Manufacturers improved in May but the overall index was down, new orders were down, shipments were down and the amount of inventory sitting on shelves increased while the prices you are paying for goods increased but you were paid the same on the goods you sold. That doesn't really sound like much of an improvement to me. In fact, if we take a look at the graph, we can see that the index hasn't even recovered to the peak it was at in May 2010 when QE 1 finished. In fact respondents stated:
"... that the prices they paid rose by 8.1 percent, on average, over the past twelve months—up from 5.9 percent in last May’s survey. Looking ahead to the next twelve months, respondents on average predicted a price rise of 5.6 percent. Firms reported considerably smaller increases in prices received: the average respondent cited a 1.9 percent increase in selling prices over the past year (down from 2.9 percent in the May 2010 survey)..."
This is very indicative of what I have been talking about in terms of the QE programs and the law of diminishing returns. Each dollar injected into the economy, and obstensibly the market, by the government at this point is having less of an incremental effect. QE 3 will more than likely even have less of an effect on buoying the economy as we go forward and since most of QE is now driving commodity prices higher and the dollar lower this effect could be magnified.
More importantly with prices paid spiking in literally all of the various manufacturing indexes across the country it is only a function of time before the spread between prices received and paid will begin to eat into manufacturers profits margins. As we have discussed several times as of late - with profit margins peaking and valuations stretched on stocks any stumble in earnings will have an outsized effect on the overall market. With the majority of indicators from manufacturing to service to the end consumer showing weakness it is very likely that our call for weaker economic growth through the balance of this year will prove prescient.