Why better economic conditions increase manufacturing activity

Market Realist

The past week's key economic and business indicator releases (Part 4 of 6)

(Continued from Part 3)

The Empire State Manufacturing Survey

The survey is put out by the New York Fed and covers a wide range of economic indicators—from general business conditions to new orders, shipments, unfilled orders, delivery times, inventories, prices paid and received, headcount, and average workweek. It also asks businesses for their six-month outlook. It’s a relatively comprehensive survey of business conditions, but it concentrates on New York state, which is a small subset of the population.

Like most of the Fed surveys, it employs a diffusion index methodology, asking respondents whether a certain metric is getting better, getting worse, or staying the same. The index value is the percent of respondents who say the metric is getting better less the percent who say it’s getting worse.

Highlights for July

Manufacturing activity is accelerating sharply, based on the Empire State Index which came in very strong at a 25.60 in the July reading. It released on Tuesday, July 15. New orders were especially very strong at 18.77, up from an already strong 18.36 in June. Shipments were also strong at 23.64. Employment was positive at 17.05 versus 10.75 in June.

Unfilled orders stood in contraction at minus 6.82. There was some pressure reflected in the price readings. Optimism also remained subdued.

Investors’ takeaway

The state of the manufacturing sector of an economy speaks a lot about the expected growth and development. Increase in manufacturing activity is directly correlated with increased economic activity, which is a sure sign of a growing economy. Equity investors like to see healthy growth in the manufacturing sector because it indicates growing economic activity, and ultimately higher corporate profits. It also indicates higher return to shareholders. Fixed income investors prefer moderate growth because high growth is usually accompanied by inflation. Inflation causes interest rates to rise and existing bondholders see a drop in the prices of their holdings.

For exchange-traded fund (or ETF) investors, the performance of popular ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Co. (GE) and Boeing Co. (BA) in its portfolio, the SPDR Dow Jones Industrial Average ETF (DIA), and the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ), also serve as a good indicator with respect to the manufacturing sector.

While the Empire State Manufacturing Survey reports on the economic conditions in New York state, the Philadelphia Fed Survey reports on the economic expectations in the Mid-Atlantic and New York regions. Let’s move on to the next section in this series to learn more about the Philadelphia Fed Survey.

Continue to Part 5

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