June 17, 2003
N.Y. Manufacturing ‘Survey’ Not All Roses

“I didn't know there was much manufacturing left in the New York area…I think it's a heck of a stretch to take this survey and say the economy is improving, but that's what happened."
Henry Herrmann, chief investment officer at Waddell & Reed

The Empire State Manufacturing Survey is, as its title suggests, just a ‘survey’: it may not be a reliable indicator of overall manufacturing activity in New York State, let alone the entire United States.  Moreover, it should be pointed out that the ESM Survey has been around for less than 2-years, about 100 manufacturing executives usually respond to the survey, and the Fed ‘seasonally adjusts data based on the Census X-12 additive procedure utilizing a logistic transformation’. I am not exactly sure what the latter means, but I do know that few investors/economists should care about how 100 NY State manufacturing executives have felt since July 2001.

These caveats aside, it is nonetheless clear that yesterday’s report on NY manufacturing helped propel stocks higher: for fund managers trying to squeeze some more upside out of stocks before quarters end, this ‘better than expected’ survey was just what the doctor ordered.

As for economists, they generally believe that an improving ESM Survey forecasts an uptick in the more highly regarded Philadelphia Fed (the Philly Fed has been around since 1968 and is released after the ESM Survey).  The odds say that economists are correct in their speculations: the ESM Survey has shown improvement in 14 out of the last 23 months - on 11 occasions the Philadelphia Fed has also improved, while on only 3 occasions did the Philadelphia Fed decline after the ESM Survey improved.

Suffice it to say, even though manufacturing activity seems to be picking up, the ESM survey had some ominous internals.  To be sure, both pricing components of the survey – prices paid and received – posted declines in June (which backs the ‘deflation’ theme). Moreover, the survey’s future capital spending index declined from May, as did both components of employment. In short, remember that the US economy is supposedly plagued by the threat of deflation, a weak jobs market, and a poor capital spending outlook.  While yesterday’s survey suggests that NY Manufacturers are doing more business and feel more confident about what the future may hold, it also suggested that these same manufacturers are growing less confident about spending/investing money, and taking on more employees.





Inefficient Markets Blow News out of Proportion

According to the US Census Department, in 1997 New York State accounted for 3.78% of total US manufacturing output. In 2000 New York’s piece of the pie shrank to 3.67%. A similar weakening trend is seen in NY manufacturing employment: 778,833 NY State Manufacturing jobs in 1997 versus 738,206 jobs in 2000.

* State by State, New York ranks 8th in total manufacturing employment and 9th in total value of shipments.

Suffice it to say, and although the above stats are dated, NY Manufacturing activity is a small percentage of the overall US manufacturing pie.  With this in mind, why did yesterday’s NY State survey of 100 manufactures catapult the stock markets higher?  I am not entirely sure, although it may have something to do with the fact that survey gave market bulls something to talk about. However, remember that if the survey had been ugly – as was the case in April (April’s ESM Survey was the second worst on record) – bulls would have completely ignored it.

In sum, I can’t remember the last time anyone paid attention to the Georgia manufacturing survey (which is sent out to all Georgia manufacturers every 2-3 years), and Georgia ranks 10th in State value of manufacturing shipments, or 1 spot below New York.  Nor can I recall the markets every rallying on ‘manufacturing activity is picking up in North Carolina!’; a state which has more manufacturing employees than the state of New York. 

Nevertheless, “NY State Manufacturing Index Jumps to Record in June”!

This was all fund managers and short coverers needed to hear yesterday to send stock prices higher.

BWillett@fallstreet.com