Manufacturing Taking A Hit

Amidst all of yesterday's turmoil two key pieces of economic data were lost. The Empire State index and Industrial Production.

Why is this information important? It's one of the four economic areas the NBER looks at when they are dating a recession:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

Let's start with the Empire State Index, which is from the NY Fed:

The Empire State Manufacturing Survey indicates that manufacturing activity in New York State weakened in September. The general business conditions index slipped 10 points, to -7.4. The new orders and shipments indexes rose modestly and were slightly above zero. Current employment indexes were negative. Current and future price indexes, though still elevated, retreated noticeably—particularly for prices paid. Indexes for future business conditions and most future activity measures remained close to last month’s levels or rose moderately in September.

Here's a chart from econoday:



This number (the gray line on the chart) has been weak for the last year. That's 8 months of sketchy reads which is not good. The only good news in this release is the current and future prices component which dropped. In conjunction with yesterday's CPI release, we're getting more and more indications inflation is becoming less of an issue.

As for industrial production:

Industrial production decreased 1.1 percent in August and was revised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respectively. After little movement over the previous three months, factory output was down 1.0 percent in August, in part because of a drop of 11.9 percent in the production of motor vehicles and parts. Excluding motor vehicles and parts, the index for manufacturing decreased 0.3 percent. The output of mines declined 0.4 percent, and the output of utilities fell 3.2 percent, as temperatures in August were unseasonably mild.

Here are the relevant charts from econoday:



Note the year over year decline has been going on for the last 8 months and has been negative since the beginning of the year.

Also note that capacity utilization is still dropping, indicating the country is using less and less of its manufacturing capacity:



The bottom line is this is terrible news. Exports -- which have been an important growth component for the last year or so -- haven't been strong enough to keep these readings anywhere except stagnant. And domestic demand is obviously not strong enough to keep things humming. The capacity utilization drop indicates manufacturing is slowing shutting down what it can to remain profitable.

Manufacturing Looking Weak

Over the last few weeks we've seen three important manufacturing reports released: industrial production from the Federal Reserve, the Empire State index from the NY Fed and the Philadelphia Index from the Philadelphia. All three point to a continued slowdown in the manufacturing sector.

First up is overall industrial production:

U.S. industrial production fell unexpectedly by 0.2 percent in May as output at utilities shrank, while capacity use slipped to the lowest level in almost three years, the Federal Reserve said on Tuesday.

Economists polled by Reuters were expecting a 0.1 percent rise in output at the nation's factories, utilities and mines after a 0.7 percent fall in April.

Manufacturing output was unchanged during the month after a 0.9 percent decrease in April. Utilities output dipped by 1.8 percent.

Overall industrial production is 0.1 percent below its year-earlier level.

In further evidence of the slowing economy, total industry capacity use fell to 79.4 percent, the lowest since September 2005, from 79.6 percent.

The year over year chart indicates this indicator has been in a downward trend for some time. In addition, the overall report was weak with declines in a variety of sectors. In other words, there wasn't one number within the report the sent it lower; it was all the individual parts of the report sending it lower.



Also note the capacity utilization has been dropping. That means we're using less of our productive capacity to make stuff. That means manufacturing facilities are slowly cutting resources to save money. That's not a good development either.

The individual reports were not good either. From the Empire State survey:

The Empire State Manufacturing Survey indicates that manufacturing activity in New York State continued to deteriorate in June. The general business conditions index fell 5 points, to -8.7. The indexes for new orders, shipments, and unfilled orders were negative and lower than their May levels. The prices paid index remained elevated, falling only slightly below last month’s record high. The prices received index rose markedly and, at 26.7, approached a record level; the future prices received index also rose sharply, reaching a record high of 47.7. Employment indexes hovered around zero. Future indexes generally improved only slightly from the relatively low levels of the past several months, although the capital expenditures index rose several points.

This report shows a double whammy. First, overall activity is dropping right now. At the same time, prices are increasing. That places policy makers in a serious bind. To stimulate activity they need to lower interest rates (which they already have). However, to do so would increase the possibility of inflation.

Here is a chart of the Empire and Philly indexes:



Note the Empire state number has been down 4 of the last 5 months.

The Philly report is not much better:

The region’s manufacturing sector continued to contract this month, according to firms polled for the June Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment were all negative this month and registered lower readings than in May. There was an appreciable increase in the share of manufacturers reporting price pressures this month, and about one-third of the firms continued to report higher prices for their own products. The region’s manufacturing executives remained optimistic about future activity, but most future indicators fell back from their May readings.

Notice the exact some conditions as the Empire state number: declining activity and increasing price pressures. Not a good combination.

Short version: there is an overall slowdown underway right now.

Industrial Production and Empire State Survey Show Increasing Weakness

From the WSJ:

The Federal Reserve reported that industrial production fell 0.5% in February after rising 0.1% in January. "The industrial sector remains in recession," said Daniel Meckstroth, chief economist of the Manufacturers Alliance/MAPI trade group.

In a separate report, the Fed's New York district bank said its Empire State manufacturing survey stood at minus 22.23 in March, down from minus 11.72 in February. The previous low was minus 19.6, in November 2001. "New York manufacturing is rapidly slowing and the record-low measure of activity makes it clear the economy is in trouble," said Joel Naroff, president of Naroff Economic Advisors.

On the chart notice the year-over-year change in production was pretty even from about April 2007 to last month. Yesterday's figure moves the number lower in a big way. As mentioned below, one month does not a trend make.

In Fed's industrial production index is a very broad measure of production. It includes everything made or consumed in the US. Note the broad nature of the decreases:

The production of consumer goods decreased 0.6 percent in February with declines in the production of both consumer durables and consumer nondurables.

The output of business equipment edged up 0.1 percent in February, as an increase in information processing equipment outweighed decreases both in transit equipment and in industrial and other equipment.

The output of defense and space equipment declined 0.3 percent in February after having increased 1.0 percent in January.

The output of construction supplies fell 0.8 percent in February after having decreased 0.6 percent in January; the level of production in February was nearly 1 percent below its year-earlier level and 5.2 percent below its peak in 2006. The output of business supplies declined 1.1 percent in February.

The production of materials fell 0.5 percent in February after having changed little in January.

As for the New York Fed, their report was not encouraging:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated further in March. The general business conditions index fell another 10½ points to -22.2, a reading that eclipsed the record-low of -19.6 set in November 2001. Although the new orders index rose modestly, the shipments index edged down, and both remained in negative territory. The prices paid index rose for the third consecutive month, reaching its highest level since mid-2006, but the prices received index declined. Employment indexes remained close to zero. Future indexes were generally positive and up slightly for the month, but still well below levels of late last year. However, the future employment indexes rebounded noticeably after falling steeply in February.

And here's the chart:



That's gonna leave a mark.