New York Factory Index Inches Higher in June


Manufacturing activity in the New York region crept higher in June, inching up from 19.1 in May to 19.6 -- the Empire State Manufacturing Index's 11th straight month indicating growth, according to data compiled by the New York Federal Reserve. Readings above zero indicate manufacturing activity is growing; below zero, contracting.

The index, which provides investors with a "snapshot" of key U.S. economic conditions, however, gave off some mixed signals. Along with manufacturing, new orders also rose, from 15 in May to 17.5 in June, and the shipments component jumped to 19.7 from 11.3.

However, pricing pressure persisted, with the prices-paid component plunging to 27.2 from 44.7 in May. Also, the inventories component dropped below zero to -1.2 in June from 1.3 in May -- a sign that inventory levels remain relatively steady after growing earlier this year. In addition, the future business conditions component dipped to 40.7 from 42.1 -- a sign that respondents' optimism had cooled somewhat.

Economists, business executives, and investors 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. In May, the ISM index dipped to 59.7 after rising to a six-year high of 60.4 in April.

June Report: Bull/Bear Tug-of-War

The market's bulls will undoubtedly point to the June Empire State index rise as additional evidence of an expansion; the market's bears, however, will read it as a sign of an uneven, not very robust recovery. Further, in addition to the softer prices-paid component, the bears can also point to the number-of-employees component, which plunged to 12.4 in June from 22.4 in May. Although the employment stat still indicates that manufacturers continue to see a need for more employees, it's the first decline for the component in six months.

Meanwhile, in the survey's supplemental section, manufacturers were asked about their capital spending plans for 2010 compared to 2009. Almost twice as many, 46% to 25%, reported increases in capital spending -- and the results were in stark contrast to sentiment in June 2009, when only 20% reported increases, and 56% reported decreases. This year's respondents also indicated that, on balance, they plan to increase spending on software, computers, and non-linear equipment, but to cut spending on structures.

In sum, June's Empire State report confirmed an ongoing expansion, but did not provide enough evidence to conclude that the economy has eliminated the risk of a double-dip recession. Manufacturing activity continues to expand, but the prices-paid and employee components indicate that firms are taking a cautious stance: They want market conditions in the months ahead to confirm increasing demand before they increase production further and hire more employees.