Empire State Index Is Very Disappointing

The general business activity reported in the April Empire State Index was ok as it fell from 22.5 to 15.8. This missed expectations for 18.2. This decline signals the manufacturing index is weakening from the rapid growth pace seen in Q1. The new orders index was even weaker as it fell from 16.8 to 9. This is a far cry from the over 20 readings seen at the end of last year. Every single indicator was down except inventories and the average employee workweek. Increasing inventories when sales are declining is terrible. It’s interesting to see that the number of employees index fell from 9.4 to 6, but the workweek increased from 5.9 to 16.9 which is the biggest increase since at least early 2013.

The other notable change is the prices received and prices paid indexes fell slightly from their recent high. I think inflation is about to be generated by high oil prices which is an extremely late cycle indicator. Oil did well in 2007 and 2008 right before the last recession and even after it started as the price peaked at $147.30 in July 2008. That was clearly pure speculation as the demand for oil was weak in 2008. It’s tough to predict such a speculative bubble based on no fundamental backdrop. I will stick with the supply and demand fundamentals and say I can’t even see oil getting to $80 in 2018 because of the fracking supply that would quickly come on line if the price increases further.

I mentioned in the title that this report was very disappointing because the forward looking indicators crashed. This is a very negative signal for manufacturing in Q2. Since manufacturing was one of the strong spots in Q1, I’m not optimistic about the service sector. The list of charts below shows half of the forward looking part of the Empire State Index. It’s a perfect score of disastrous results as the expectations for business conditions in the next 6 months fell from a very optimistic 44.1 to a somewhat pessimistic 18.3 which is the lowest reading since early 2016. The expectation for new orders and shipments fell 24.5 and 24.8 points respectively. The expected spending on technology and the projection for capex fell 0.4 and 4.2 points respectively. There’s nothing positive about the forward looking segment of this report. This could be a one off signal, but it’s following the weakness in European manufacturing, so it should be accurate.