Altruistica

"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

16 January 2007

Empire State index falls to lowest level since summer '05


Further confirmation that a recession is underway. While manufacturing has been weak for three years, these types of indicators point to broad-based weakness in the supply chain and in the employment outlook. Here's a further indication of the growing gap between rich and poor in this country.

WASHINGTON (MarketWatch) -- Manufacturing activity in the New York area fell sharply in January to its lowest level since the summer of 2005, the New York Federal Reserve Bank said Tuesday. The Empire State index fell to 9.1 in January from 22.2 in December. The decline was worse than Wall Street expected. Economists were forecasting the index to slip to 20.0 from the initial reading of 23.1 in December. See Economic Calendar. There were few silver linings in the details of the report. The new orders, shipments and employment indexes fell sharply, while the inventories index dropped to its lowest level in well over a year.

The Empire State index is of interest to traders primarily because it's seen as an early forecast of the national Institute for Supply management factory survey due out in two weeks. In December, the ISM manufacturing climbed back above 50, a sign of contraction in activity, after falling below the benchmark for the first time in five years in November. In January, the new orders index fell to 10.3 from 22.5 in the previous month. Shipments fell to 16.1 from 27.6 in December. The employment index dropped to 6.9 in January from 18.6 in the previous month. The prices paid index rose to 35.1 from 28.1 in December.


Not surprisingly, the Bloomberg report is more realistic and offers more detail. The keys to consider are the outlook by manufacturers and stockists. They are working down inventories fast.

New York State Manufacturing Slows More Than Forecast

Jan. 16 (Bloomberg) -- Manufacturing growth in New York state slowed more than forecast this month as new orders and sales deteriorated. The Federal Reserve Bank of New York's general economic index fell to 9.1 in January, the lowest in 19 months, from a revised 22.2 in December, the bank said today in New York. A number greater than zero signals expansion. The U.S. housing slump is curbing demand for manufactured goods, and factories are restraining production to work off bloated inventories. An index of employment fell to the lowest since July, suggesting New York state's manufacturers are scaling back hiring plans.

Here's an amusing quotation wit this analyst's 20-20 rear view vision. What do you think he was saying to his brokers in the fall when the reports first deteriorated sharply? Statistical anomaly? "There was a big inventory buildup in the second half of last year, and it's about time for a pullback," said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ''We're looking for the inventory correction to slow down the rate of growth in the first quarter.'' No kidding?
The New York Fed's index was projected to fall to 19.3, the median of 42 estimates in a Bloomberg News survey of economists, from an originally reported 23.1 in December. Forecasts ranged from 13 to 26. The index measuring the outlook for six months from now fell to 32.5 from 41.9, today's report showed.

It's unusual for the outlook to fall below 40 since there's so much survey bias here.
The New York Fed's gauge of new orders dropped to 10.3, the lowest since June 2005, from 22.5 in December. The shipments index fell to 16.1 from 27.6. Manufacturing employment fell to 6.9 from 18.6. Today's report reflects revisions to data stretching back to 2001, when the index was started. A gauge of inventories fell to minus 19.2, the lowest in more than four years, from minus 7.9 the previous month as the state's manufacturers worked off stockpiles at a faster pace. An index of prices paid for raw materials rose to 35.1 from 28.1. A measure of prices received rose to 19.2 from 13.5. The New York survey offers an early clue to the state of manufacturing nationwide, which accounts for about 12 percent of the economy. Today's survey will be followed on Jan. 18 by a similar report from the Philadelphia Fed. The Institute for Supply Management releases its nationwide manufacturing report Feb. 2. This month's ISM report showed manufacturing unexpectedly expanded in December after shrinking for the first time in more than three years in November. Stockpiles at manufacturers increased in November to 1.24 months at the current sales pace, the highest since August 2003, a separate report showed. A Federal Reserve report on industrial production, which also includes mining and utilities, will probably show an increase of 0.1 percent for December, according to a Bloomberg survey ahead of the Jan. 17 release.

Guess what the Fed will do? Nothing, I'd bet. They can't cut rates as it would crush the dollar but they can push up short and intermediate market rates to prop the long bond market. Paulson and crew likely view a rate increase (or tax increases for that matter as politically unpalatable.
The Federal Reserve, which has left its key interest rate unchanged for four straight meetings after increasing it 17 times, is counting on a slowing economy to help subdue inflation. At the Dec. 12 meeting, policy makers pointed to manufacturing as an ''additional source of downside risk to economic growth in the near term,'' according to minutes released on Jan. 3. Still, they ''continue to expect the economy to expand at a rate close to or a little below the economy's long-run sustainable pace.'' Growth slowed in the third quarter to a 2 percent annual rate, dragged down by the biggest decline in home building in 15 years. The pace probably picked up to 2.5 percent in the fourth quarter, according to a Bloomberg News survey of economists early this month.

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