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First Cut: New York Fed manufacturing general business conditions within reach of expansion again in June

The New York Fed manufacturing general business conditions index in the June Empire State Survey rose sharply for a second month in a row to reach -0.2 after -48.5 in May and -78.2 in March. The index reading remained in contraction for a fourth month in a row but its solid improvement could be a result of the availability of government programs to return workers to payrolls and fund operations that have brightened the current outlook. Manufacturers will also have had time to consider their options and perhaps shift some capacity to other types of manufacturing more in demand during the COVID-19 pandemic. The index for business conditions six months from now leaped higher to 56.5 in June after 29.1 in May, and was its highest since 56.8 in October 2009. This should not be read as anticipating exceptionally good activity in the near future. Rather, as a measure of sentiment, it reflects relief that the economy is not likely to plumb the depths that were initially feared when economic activity was forced to close down to prevent the spread of COVID-19.

The general business conditions index is not calculated from components. Nonetheless, the changes in most of the detail indexes line up pretty well with the tone of the headline.

New orders rebounded to -0.6 in June after -42.4 in May and -66.3 in April. The contraction in new orders appears to have bottomed out. Future months may not see strong incoming orders, but at least cancellations and lack of fresh demand are waning. Order backlogs continued to decline at -12.5 in June after -20.3 in May with little on the books to support present activity. However, the improvement in orders lead to the index for shipments to rise to 3.3 in June, the first positive since 18.9 in February. What new orders there are will be filled and shipped out quickly.

Declines in employment were slower in June with the index at -3.5 after -6.1 in May. Most of the big layoffs have been accomplished and now businesses require less adjustment to payrolls. Also, the availability of the Paycheck Protection Program to rehire and retain workers has helped. The index for the average workweek also contracted more slowly at -12.0 after -21.6. Even with fewer workers, the length of the workweek necessary to fill orders is shorter.

The index for delivery times widened slightly to 1.3 in June after -4.1 in May. The June reading was close enough to neutral to suggest that supply chains are not running too fast or too slow at present. The index for inventories remained in contraction for a third month in a row at -0.6 after -3.4 in May and -9.7 in April. Even with inventories close to neutral, businesses will be cautious about restocking unless and until it is clear that the goods are going to find a market.

The index for prices paid rose to 16.9 in June as some input costs were moving higher again. Notably the plunge in energy prices started to reverse in May and continued into June. There are also food prices – meats in particular – that are on the rise.

The New York-ISM equivalent index rose to 50.0 in June after 40.5 in May. This is only one regional index but it does have a decent correlation (0.728) with the ISM Manufacturing Index. While I would wait for more numbers out of the other District Banks – in particular Philadelphia and Richmond – I would take this as a hint that the worst may be over for the factory sector.

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