NY state factory activity unexpectedly slows in June

It's only one piece of the recovery puzzle, but it's one investors can not afford to ignore, and in June it regressed. Manufacturing conditions in the New York region deteriorated in June, after several months of improvement.

The Empire State Manufacturing Index fell to -9.4 in June from -4.6 in May, the New York Federal Reserve announced Monday. The index totaled -4.7 in April. Readings below zero indicate manufacturing activity is contracting.

Economists surveyed by Bloomberg News had expected the Empire State Manufacturing Survey to total -2.0 in June.

Still, despite the disappointing June N.Y. region data, Wachovia economist Tim Quinlan, remains a bull regarding the likelihood of a U.S. economic recovery.

"The drawdown in inventories as much as anything else is setting the stage for a return to growth," Quinlan told Bloomberg News Monday. "We look for growth to return to the U.S. economy as early as the second half."

Most firms cut capital spending

Further, in the supplemental questions section, 56 percent of respondents reported reductions in overall capital spending, while only 20 percent reported increases. That compares to 32 percent and 36 percent, respectively, in June 2008.

Also in June, about 55 percent cited sales and demand trends as a negative factor, while only 21 percent cited these trends as a positive factor.

In addition, estimated capital spending for calendar 2009 across all responding companies average $1.9 million, down 24 percent from $2.5 million in 2008; the median decreased to $275,000, down 42 percent from $500,000 in 2008.

Economists monitor the Empire State index because it typically provides an early-read on larger manufacturing surveys released later in the month, such as the Institute for Supply Management's manufacturing survey.

Economic Analysis: A disappointing June stat from the telling New York region: hopefully, it's just a blip, and not the sign of a double-dip recession, or resumed deterioration in the economy. The industrial sector's condition is roughly equivalent to a patient with internal bleeding: at this stage, we've stopped almost all of the bleeding, but the patient needs time (and fiscal stimulus) to regain strength.

Further, if some manufacturing activity, as expected, is permanently lost to globalization, that underscores the need for the United States to identify and create new, value-added sectors (including information technology, infrastructure, health care, biotech, high-end and tech-intensive manufacturing, and renewable energy) to make up for the loss of classic industrial output and jobs.

Those new growth sectors must appear for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities, and sustainable GDP growth.

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