Up the Hudson River Without a Paddle

Freedom Financial Archive | Originally posted Oct 18, 2022

October’s Empire Manufacturing Index paints a dire economic picture going into year end.

The end of the month always brings a plethora of data, especially from the regional Federal Reserve banks.

Each section provides a broad overview regarding the health of the economy in their district.

The Empire Index is the first, closely followed by Philadelphia and Chicago.

The indexes can vary in direction at times, since a recession or expansion will start at different times in different locations.

It’s also important to understand the drivers of each location.

But normally these three locations are leading indicators for the direction of the U.S. They act as a strong bellwether for how activity will be throughout the month of October.

The October Empire Manufacturing index fell well below estimates and showed an acceleration lower vs September.

This is consistent with our views over the last few weeks that consumer activity was going to take a big leg lower in October.

The plateau in activity hit hard in September. Thatmonth now looks like the pivot that sent us lower in October and throughout the remainder of the year.

Just last week, three things were on my mind: the decline in savings, rise in consumer credit, and the roll over in retail sales.

The Empire State data shows how that is now hitting the manufacturing side, and it will deteriorate further as we head into year end.

As a summary, October’s general business conditions fell to -9.1 vs estimates of -4.3 while September’s was -1.5.

Prices paid reversed higher as costs remain elevated for companies, but the prices received (what the company sells into the market) moved a bit lower.

This compresses margins and will put more pressure on companies to push their prices higher… or at least keep them elevated.

This is another leading indicator for inflation via the Consumer Price Index (CPI).

The employment side softened but remains in expansionary territory.

Between pricing and employment, there remains a lot of support for the Fed to keep moving rates higher at an accelerated clip.

New orders slowed but still eked out an expansionary number.

But the pace has been slowing considerably, weakening expectations.

The below chart looks at general business conditionsexpected six months from now.Itpoints to a serious problem when evaluating future hiring, CAPEX, and general business expansion.

The data keeps showing a slowing economy that is slowing at a faster rate. The unfilled orders have collapsed as inventories continue to expand as business activity/ manufacturing loses steam.

Many of these important leading indicators are showing some of the worst conditions going back to 2002.

The data supportsincreasing inflation, while the economy in the Empire region slows further.

The Empire region is technically called The Second Federal Reserve District. It includes New York State, Northern New Jersey, Southwestern Connecticut, Puerto Rico, and the U.S. Virgin Islands.

Even as the economic signals problems, the inflation/job backdrop will keep the Fed focused on raising rates to address their dual mandates. Those two key mandates are price stability and full employment.

New export orders and underlying new orders mixed with future business conditions help confirm our views of a pivot lower in economic activity heading into year end.

The below table is a summary of the Empire Manufacturing Index’s components over the last six months.

Buckle up for a bumpy ride into year-end!

Freedom Financial News