Friday, June 20, 2008

Manufacturing Looking Weak

Over the last few weeks we've seen three important manufacturing reports released: industrial production from the Federal Reserve, the Empire State index from the NY Fed and the Philadelphia Index from the Philadelphia. All three point to a continued slowdown in the manufacturing sector.

First up is overall industrial production:

U.S. industrial production fell unexpectedly by 0.2 percent in May as output at utilities shrank, while capacity use slipped to the lowest level in almost three years, the Federal Reserve said on Tuesday.

Economists polled by Reuters were expecting a 0.1 percent rise in output at the nation's factories, utilities and mines after a 0.7 percent fall in April.

Manufacturing output was unchanged during the month after a 0.9 percent decrease in April. Utilities output dipped by 1.8 percent.

Overall industrial production is 0.1 percent below its year-earlier level.

In further evidence of the slowing economy, total industry capacity use fell to 79.4 percent, the lowest since September 2005, from 79.6 percent.

The year over year chart indicates this indicator has been in a downward trend for some time. In addition, the overall report was weak with declines in a variety of sectors. In other words, there wasn't one number within the report the sent it lower; it was all the individual parts of the report sending it lower.

Also note the capacity utilization has been dropping. That means we're using less of our productive capacity to make stuff. That means manufacturing facilities are slowly cutting resources to save money. That's not a good development either.

The individual reports were not good either. From the Empire State survey:

The Empire State Manufacturing Survey indicates that manufacturing activity in New York State continued to deteriorate in June. The general business conditions index fell 5 points, to -8.7. The indexes for new orders, shipments, and unfilled orders were negative and lower than their May levels. The prices paid index remained elevated, falling only slightly below last month’s record high. The prices received index rose markedly and, at 26.7, approached a record level; the future prices received index also rose sharply, reaching a record high of 47.7. Employment indexes hovered around zero. Future indexes generally improved only slightly from the relatively low levels of the past several months, although the capital expenditures index rose several points.

This report shows a double whammy. First, overall activity is dropping right now. At the same time, prices are increasing. That places policy makers in a serious bind. To stimulate activity they need to lower interest rates (which they already have). However, to do so would increase the possibility of inflation.

Here is a chart of the Empire and Philly indexes:

Note the Empire state number has been down 4 of the last 5 months.

The Philly report is not much better:

The region’s manufacturing sector continued to contract this month, according to firms polled for the June Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment were all negative this month and registered lower readings than in May. There was an appreciable increase in the share of manufacturers reporting price pressures this month, and about one-third of the firms continued to report higher prices for their own products. The region’s manufacturing executives remained optimistic about future activity, but most future indicators fell back from their May readings.

Notice the exact some conditions as the Empire state number: declining activity and increasing price pressures. Not a good combination.

Short version: there is an overall slowdown underway right now.