Empire Manufacturing and Philly Fed Both Signal Contraction

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The growth story in the United States continues to fade. That is the message from the regional Federal Reserve manufacturing reports from the Empire Manufacturing (New York Fed) and from the Philly Fed (Philadelphia). These are also real-time numbers for the month of October. Real-time data right now should matter to investors and economists much more than data for September and August — after all, the Fed already voted not to raise rates.

The Empire State Manufacturing Survey for October came in at -11.36, versus a Bloomberg consensus of -7.0. The reading was far worse than expected, and the components suggested that more weakness could persist. New orders were very troubling, at -18.92, and that marked the fifth straight month of negative readings. Unfilled orders were also very negative, as were shipments (-13.61). Even the employment segment was at -8.49, with workweeks being shortened. The prices on finished goods were negative too.

Then there is the Philadelphia October 2015 Manufacturing Business Outlook Survey with further weakness coming through. This came in at -4.5, versus the -1.0 expected reading by Bloomberg. While it sounds less bad than the -6.0 from September, the reality is that the components that would indicate strength ahead just are failing to live up to par as the new orders and shipments indexes also turned negative this month. The labor market indicators also weakened in October, another indicator that September’s weak payrolls may persist. The Philly Fed’s commentary said:

The diffusion index for current activity remained negative for the second consecutive month, although it edged slightly higher from -6.0 in September to -4.5 (see Chart 1). The indexes for current new orders and shipments showed notable deterioration this month, with both indexes falling below zero, marking the first negative reading for the new orders index since May 2013. Indicators for delivery times and unfilled orders were also negative. Thirty percent of the firms reported a decline in inventories this month, and the current inventories index declined 15 points.

The survey’s indicators for labor market conditions suggest slightly weaker employment. The percentage of firms reporting declines in employment (15 percent) was slightly greater than the percentage reporting increases (13 percent). The employment index declined nearly 12 points, from 10.2 to -1.7. Firms also reported overall declines in average work hours in October, and the workweek index was negative for the first time since May.

Some may want a rate hike and some may want slower growth to keep the easy money flow going. Those issues both become precarious when you have an economy shrinking to the point that a rate hike justification simply cannot be made with “quantitative bullishness.”

As a reminder, these are real-time indicators. The Federal Reserve might have been able to forecast some of this weakness when it decided to not raise interest rates, but it simply did not have this more real-time information.

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