Economic First Look: Manufacturing in Mind

 | Dec 10, 2011 | 8:45 AM EST
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  • Treasury Budget, 2 p.m. (all times EST)


  • NFIB Small Business Optimism Index, 7:30 a.m.
  • Retail Sales, 8:30 a.m.
  • Business Inventories, 10 a.m.
  • FOMC Meeting Announcement, 2:15 p.m.


  • Import and Export Prices, 8:30 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.


  • Jobless Claims, 8:30 a.m.
  • Producer Price Index, 8:30 a.m.
  • Empire State Manufacturing Survey, 8:30 a.m.
  • Treasury International Capital (TIC) report, 9 a.m.
  • Industrial Production, 9:15 a.m.
  • Philadelphia Fed Survey, 10 a.m.


  • Quadruple Witching
  • Consumer Price Index, 8:30 a.m.

There's quite a bit to look forward to on this week's calendar, with inflation, manufacturing and retail sales data expected. There's also the Federal Open Market Committee (FOMC) meeting. Though I want to hear the Fed's outlook, I don't expect any major policy moves. What I'm most interested to see is how events that suggest soft growth in Europe and China are affecting economic conditions here. For that, the two timeliest barometers are the Empire State Manufacturing Survey from the New York Fed, and the Philadelphia Fed survey.

These two surveys are the current read on manufacturing in December, but they don't translate directly into dollars or the GDP report. And just because these are regional Fed surveys, it doesn't mean that they only measure activity within these Federal Reserve districts. Companies in these districts often have global sales. The New York Fed district has a bit of a tech bias, while the Philly Fed district is weighted more towards autos and heavy industry.

What concerns us most is Europe, of course, and perhaps slowing growth in China. As our exports of goods to the European Union are nearly three times the amount of our goods exports to China, I am not as concerned about slowing growth in China as I am about recession in Europe. For this data, go straight to the two surveys' components for new orders. These surveys do not have a category specifically for exports (unlike the broad national manufacturing survey from the Institute for Supply Management), but the new orders component at least gives us some information. And don't just look at the current conditions, look at the separate figures for the six-month outlook as well.

In November's Empire State survey, the current conditions/new orders component registered -2.07, down from 0.16 in October, so there were slightly more respondents reporting lower orders than higher orders. However, businesses in that district were more optimistic about the future: the future conditions (next six months) shot up to 35.37 from 12.36. Since "zero" is the delineation between expansion and contraction in this metric, this is a sizable improvement in optimism going forward.

In the Philly Fed survey, we see that the current new orders component also fell, to 1.3 from 7.8, with "zero" separating expansion and contraction. But the forward-looking element of new orders surged to 39.8 from 26.7. Again, businesses are much more optimistic about sales prospects.

Will that optimism change in December as Europe's woes continue, despite a plan to stem the crisis leading to a drop in the six-month outlook? And will the new orders we saw last month get cancelled, which may be apparent in the shipments component of the two surveys?

A completely different consideration, that might even be favorable, is based on China's slowing growth. What does the prices-paid component tell us about where manufacturers' costs are headed? In the Empire State survey, the prices-paid metric eased to 18.29 from 22.47. Expectations are for more price increases (though less than last month's). The six-month outlook for the prices-paid component registered 36.59 in November from 40.45 in October.

The Philly Fed survey shows similar results: the current prices-paid metric rose to 22.8 from 20, but the forward-looking, six-month outlook dipped to 40.9 from 44.7. I want to know if the outlook for inflation is changing, perhaps in response to whether Chinese demand for raw materials has caused businesses to lower expectations for input-price increases. After all, expectations for higher prices are where inflationary roots take hold.

Any decline in manufacturers' expectations for higher prices may improve their general outlooks. To the extent that they see lower input prices for commodities, one hopes they can afford to add employees given expectations for increased orders. Both surveys show notable improvements in expectations for adding staff in the next six months, and this metric will likely be of great interest to economists. Hopefully, optimism won't be derailed by events overseas. We'll find out more in the data.



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