I have not commented on the regional manufacturing reports much lately because they bear no resemblance to reality.
Setting reality aside, let’s take a look at the Empire State Survey which kicks off another month of regional surveys.
The Econoday consensus estimate for the Empire State region diffusion index was 15. The actual report was +9.8. Econoday praised this meaningless report as welcome.
A little less strength is probably welcome in the New York Fed’s manufacturing sample where gains at times have been unsustainable. The Empire State index came in at 9.8 in July vs Econoday’s consensus for 15.0 and against June’s very hot 19.8.
New orders are strong at 13.3 but down nearly 5 points from June while unfilled orders moved back into contraction to minus 4.7. Employment slowed to 3.7 for a 4 point dip while shipments also slowed but are still very solid at 10.5.
Another sign of slowing is a nearly 8 point dip in general expectations to 34.9 which is relatively moderate for this reading, one that always runs well above current assessments. Inventory building is slowing this month with price readings stable and favorable as both inputs and selling prices are showing positive pressure.
This report has been very strong this year and well above actual strength in the nation’s factory sector. Watch for Thursday’s Philly Fed report for the second regional update this month on the factory sector and where another outsized gain, at 23.9, is the Econoday’s consensus.
Empire State Index
Manufacturing production is about where it was in 2005.
Manufacturing Production Year Over Year
Diffusion Index Problems
Manufacturing production is up 1.36% from a year ago. Yet the regional manufacturing reports and the ISM have been on fire.
Diffusion indexes like the regional manufacturing reports and the ISM survey have a flaw in that size does not matter, only direction matters. One small company improving counts will offset a large company faltering.
For example, Ford and GM carry no more weight than a company employing a hundred workers. A tiny company hiring 10 workers will offset 3,000 layoffs at Ford. A tiny company increasing production will offset a larger company decreasing production, or vice versa.
These kinds of things can average out. But they haven’t for a year. Industrial production has not lived up to expectations from the regional reports.
Mike “Mish” Shedlock