Thursday, June 21, 2007

Are Things Picking Up?

There have been 5 manufacturing surveys released in the last month. Below are some excerpts from each one to get an idea for where various manufacturing regions are.

Philadelphia Fed sees increases:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current business activity, increased from 4.2 in May to 18.0 this month, its highest reading since April 2005 (see Chart). The percentage of firms reporting increases (40 percent) exceeded the percentage reporting decreases (22 percent). Demand for manufactured goods, as represented by the survey’s new orders index, showed notable improvement this month. The new orders index rose 10 points, to its highest reading since March 2006. The current shipments index fell four points but remained positive. Indexes for delivery times and unfilled orders, although remaining negative, improved from their May readings and are at their highest readings this year.

Empire State Survey Sees Growth:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved significantly in June. After three months of lackluster readings, the general business conditions index bounced up 18 points, to 25.8.

The new orders and shipments indexes also rose. The prices paid index climbed several points, while the prices received index fell. Employment indexes were marginally positive. Future indexes indicated a high level of optimism for the six-month outlook, while capital spending and technology spending indexes dropped markedly.

Kansas City Sees a Slight Decline:

Growth in Tenth District manufacturing activity eased slightly in May but remained solid, and expectations for future factory activity were not as strong as in the past two months. The price indexes in the survey climbed higher, largely as a result of increasing energy prices, particularly gasoline.

The net percentage of firms reporting month-over-month increases in production in May was 20, down from 26 in April but up from 8 in March (Tables 1 & 2, Chart). Production decelerated slightly at both durable- and non-durable-goods-producing plants. The year-over-year production index climbed slightly higher, while the future production index declined from 41 to 30.

Richmond Fed Still In the Red:

Manufacturing activity in the central Atlantic region continued to decline in May, according to the Richmond Fed’s latest survey. Respondents reported that the weakness in factory shipments moderated and they noted greater declines in employment, new orders and backlogs. In addition, capacity utilization and delivery times edged slightly lower, and manufacturers reported somewhat slower growth in inventories.

There is also the Chicago Purchasing Managers Index, which rebounded sharply in the latest survey

So, we have three good, one fair and one terrible. That seems to fall in line with today's release of the leading economic indicators:

The Conference Board's index of leading indicators, a gauge of the economy's direction, rose 0.3 percent in May after a 0.3 percent drop the prior month. The Philadelphia Federal Reserve Bank's factory index jumped to the highest in more than two years in June.

The six-year expansion, which slowed to an annual pace of 0.6 percent last quarter, is gaining new life as companies increase investment. Economists are raising forecasts and predict growth this quarter will exceed 3 percent.

``The winter blahs for the economy seem to have receded,'' said Neal Soss, chief economist at Credit Suisse Group in New York, who correctly forecast the gain in the leading indicators. ``One of the most reassuring features of the economy has been job growth, and we expect that to persist.''

It looks like the economy will pull out of the .6% growth rate in the next few quarters. However, there are a few wild cards. The obvious one is housing. So far, the decline in the housing market has not impacted consumer spending. We'll have to see if that continues. There are still about two years worth of resets out there in mortgage land, so we're nowhere near out of the woods.

In addition, gas is really expensive right now. Last year the economy accepted the higher prices, but that was a different economic situation. Last year's "not too expensive gas prices" may become this year's "gas is too expensive" prices.

Employment is picking up, but it is not a hot bed of activity. Last month the economy added 157,000 jobs. This is OK, but not something to write home about.

And then there are bond yields. While I have argued they aren't anywhere near cost prohibitive levels, the market sure seems to think so. My guess is the market has gotten use to extremely favorable financing levels, but will some to the realization that 5% - 5.5% is nowhere near a catastrophe.

Finally there is the Fed. The market finally listened to what they were saying and realized the Fed is more concerned about inflation right now. If the economy picks-up some steam and the Fed is still concerned about inflation they may consider hiking rates to contain inflation. However, that move would be at least a quarter of decent growth away if not two. So while it's a possibility, it's not a possibility that will happen until say the beginning of the fall at the earliest.