On Tuesday, the Empire State manufacturing region returned to positive territory following seven months of contraction.

Today, the Philadelphia Fed manufacturing region returned to positive territory following five months of contraction.

Is the worst over for manufacturing or is this simply a breather?

Let’s start with a look at the Empire State and Philadelphia Fed reports.

Empire State

Empire State 2016-03-14A

The headline general business conditions for the Empire State region climbed seventeen points to 0.6, its first positive reading since July of last year. The new orders and shipments indexes rose well above zero for the first time in several months, pointing to an increase in both orders and shipments. Labor market conditions were little changed, with employment and the average workweek holding fairly steady.

Empire State Details

Empire State Manufacturing Index
Component February March Change
General Business Index -16.64 0.62 17.26
New orders -11.63 9.57 21.2
Shipments -11.56 13.88 25.44
Unfilled orders -6.93 -3.96 2.97
Delivery time -3.96 -1.98 1.98
Inventories -6.93 0 6.93
Prices paid 2.97 2.97 0
Prices received -4.95 -5.94 -0.99
Number of employees -0.99 -1.98 -0.99
Average workweek -5.94 1.98 7.92

That’s quite an improvement in the New York region. Let’s turn to Philadelphia.

Philly Fed Index

Philly Fed 2016-03-16

Philly Fed Details

Philly Fed 2016-03-16A

Fundamental Change?

Here’s the key question: Do these reports represent a fundamental change?

I suspect not, for numerous reasons:

  1. Slowing retail sales (See Retail Sales Down, January Sales Revised to -0.4%)
  2. Inventory-to-Sales reports that look horrific (I will report on that later today)
  3. CEO hiring expectations (see 38% of Companies to Reduce Employment in 2016, Only 29% Expect Increase: Five Consequences)
  4. That 82.8% Expect Real Incomes Will Decline in 2016.
  5. The global economy still looks anemic.
  6. The US dollar, although starting to fall, is strong enough to hamper exports.

In regards to point four, It’s not just the consumer expectation of falling real incomes, Obamacare premiums and rising rents nearly guarantee that outcome.

So why the jump? Things don’t fall or rise forever. I had actually been expecting a jump; I just did not know when. This was the month.

Orders get put off, and off, and at some point they have to rise, from very depressed levels. Stabilization or even slight improvements from here do not represent good times for manufacturers.

This bounce looks good, but it must be viewed in light of falling orders for months on end that had to turn at some point, for a while.

Mike “Mish” Shedlock