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First Cut: New York Fed manufacturing general business conditions index plunges in June

The New York Fed’s general business conditions index for manufacturing plunged 26.4 points to -8.6 in June from 17.8 in May. The report said this was the biggest decline in the series history. The reading was the lowest since -9.2 in October 2016. While the index is not calculated from components, it does reflect a sharp month-to-month deterioration in perceptions of the health of the regional factory sector.  The index for future business conditions did not experience the same shocking drop, but it was down to 25.7 in June from 30.6 in May, hinting that the outlook for business activity has slowed to modest from moderate.

It is possible that the one-month eye-opener is due to concerns about orders in the context of unsettled trade and tariff policy. Some activity may have been pushed forward to get ahead of higher costs and delays along the supply chain and now businesses are awaiting resolution before committing to orders because of uncertainty in pricing and production. It also speaks to the damaging impact of delays in trade negotiation that in turn foster lower global activity. Orders presently lost may never be recovered.

There were large declines for new orders (-12.0 in June after 9.7 in May, lowest since -16.1 in October 2015) and unfilled orders contracted (-15.8 after 2.1). Without fresh orders and little to take up the slack, activity could be minimal for the coming months. Shipments slowed (9.7 after 16.3, lowest since -16.2 in December 2015). Delivery times narrowed (-4.5 after 0.7) and inventories continued to contract (-5.3 after -4.1).

Prices paid have not changed much in the past few months (27.8 in June after 26.2 in May and 27.3 in April). Prices received suggest that pricing power has fallen off notably (6.8 after 12.4, lowest since 6.2 in August 2017).

As is always the case, it is premature to put too much emphasis on one month’s data, and for one region that does not have the broadest selection of manufacturing businesses. Still, it is a warning that trade policy is eating into economic activity at end of the second quarter and could be cutting into upward momentum for the third.

The NY-ISM equivalent measure fell to 48.4 for June following 52.7 in May and was the first time in contractionary territory since 49.2 in December 2016. The index has the second weakest correlation with the ISM Manufacturing Index among the five District Bank Surveys. However, it raises the possibility that other regions will signal weakness as well.

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