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More weak economic reports came out today. Let's take a look at two regional manufacturing reports.
Philly Fed Region "Weak but Stable"
The Bloomberg Economic Consensus for the Philadelphia Fed Business Outlook Survey was 8.0. Economists got the leading sign correct, but the consensus estimate was a tad high with the index posting 6.7.
Activity in the Mid-Atlantic manufacturing sector is slow but stabilizing, based on the Philly Fed's general conditions index which came in at 6.7 for May, down slightly from 7.5 in April and against Econoday expectations for 8.0.Weak Demand
The best news in the report is a slight uptick in new orders, to 4.0 from 0.7. This isn't searing but is at least in the plus column as are shipments, at 1.0 from minus 1.8. Employment, at 6.7, is also in the plus column.
Manufacturers in the region are reporting significant price contraction, especially in costs which is a surprise given the rise underway in oil prices. Manufacturers are also reporting declining prices for finished goods as well. These inflation readings, if repeated in subsequent reports, will give the edge to the doves at the Federal Reserve.
A plus in the report is a healthy reading of 33.9 for the 6-month outlook, down only slightly from April's 35.5 and up from 32.0 in March. The manufacturing sector, hit by weak exports and trouble in the energy sector, has yet to find its footing this year but this report, which is very closely watched, points to stability that in turn hints at a rebound in the months ahead.
In light of rising energy prices, price contraction especially in finished goods tells the real story: very weak demand.
The six-month outlook is meaningless. Such readings are perpetually overoptimistic except at the bottom of recessions.
Industrial production will go nowhere with readings like these. I suggest things appear to be "stabilizing" before the next decline.
Philly Fed vs. Industrial Production
Kansas City Fed Consensus Way Too Optimistic
The range of economists' estimates for the Kansas City Fed Business Outlook Survey was -1 to +1. Economists were not even close on this one.
The early indications on May's manufacturing activity have been slightly positive, that is until the Kansas City Fed report where the composite index is in deeply negative ground at minus 13. This is the weakest of the recovery for this reading and follows an already weak minus 7 in April.Kansas City Region "Declines More Sharply"
New orders this month are deeply negative, at minus 19, as are backlog orders at minus 21. These readings, reflecting contraction for export orders and trouble in the energy sector, point to significant trouble for the region's manufacturing activity in the months ahead.
Shipments are already in contraction, at minus 9, as is employment, at a deeply negative minus 17 that contrasts with mostly positive employment indications in other reports.
The Federal Reserve Bank of Kansas City reports Tenth District Manufacturing Declines More Sharply.
According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined more sharply in May and producers’ expectations also fell, with both reaching their lowest levels since mid - 2009.Recession in KC Region
“Factories in our region saw an even sharper decline in May than in March or April, as exports fell further and energy - related producers saw another drop in orders,” said Wilkerson. “However, firms’ overall still plan a modest in crease in employment over the next six to twelve months.”
The month-over-month composite index was -13 in May, down from -7 in April and -4 in March. The last time the composite index was lower was in April 2009. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The overall slower growth was mostly attributable to declines in durable goods manufacturing, including a continued decline in aircraft production and further weakness in metals and machinery. In addition, several nondurable goods plants also reported sluggish activity, particularly for plastics and food production.
Production fell most sharply in energy-producing states like Oklahoma and New Mexico, but it was also down in most other District states. The majority of other month - over - month indexes also decreased from the previous month . T he production index contracted from -2 to -13, and the shipments and new orders index es also fell. The order backlog, employment, and new orders for exports indexes edged higher but still remained well below zero. The finished goods inventory index increased from - 1 to 0, while the raw materials inventory index dropped into negative territory.
If it appears the KC region is in recession, it's because it probably is. Nonetheless, favorable expectations six months out refuse to die.
Mike "Mish" Shedlock