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First Cut: New York Fed’s Empire State Survey shows business conditions improved in July, but orders are still soft

The general business conditions index in the New York Fed’s Empire State Manufacturing Survey improved visibly, rising to 4.3 in July after -8.6 in June. The index for future business conditions rose as well, up to 30.8 in July after 25.7 in June. Compared to the performance in 2017 and 2018, these are relatively weak numbers. However, it suggests that the reset to slower activity in late 2018 and the increased volatility in 2019 that accompanied greater uncertainty — mainly on trade policy — have given way to an underlying pace of growth that is still on the expansionary side, if a modest one.

The index is not computed from components and is more of a reflection of business sentiment. The subindexes point to conditions that are still weaker than at any time since the second half of 2016.

The new orders index remained in contractionary territory for a second month in a row at -1.5 in July after -12.0 in June. Unfilled orders were also below neutral for a second straight month at -5.1 after -15.8. These mark some improvement, but the factory sector isn’t getting orders and is working down what backlog remains. Shipments were slower for a second month in a row, falling to 7.2 in July after 9.7 in June.

Delivery times widened to 4.4 in July after -4.5 in June, possibly in part in response to rapid contraction in inventories. The inventory index was down for a third month on a steepening path at -10.9 in July after -5.3 in June and -4.1 in May. Businesses have responded quickly to slower orders and expectations that activity would generally be weaker.

The index for employment was below neutral for a second month at -9.6 in July after -3.5 in June and suggests that the need for new factory workers is over for now. The workweek expanded in July at 3.8 after -2.2 in June, hinting that factories are going to expand hours for the existing workforce rather than bring on new hires.

The prices paid index was not much changed at 25.5 in July after 27.8 in June and 26.2 in May. Declines in gasoline prices are helping to keep overall price pressures low, although in early July prices were beginning to move higher. The index for prices received dipped to 5.8 in July after 6.8 in June, and was the lowest since 4.5 in May 2017. The pricing power seen in the last couple of years is fading.

The New York-ISM equivalent index nudged up to 49.0 for July from 48.4 in June. The calculation hasn’t seen back-to-back below-50 readings since November-December 2016. The index is among the weaker correlations among the five District Bank surveys of manufacturing. However, it points to continues sluggish activity for the overall manufacturing sector.


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