There is seemingly no stopping the runaway train that is the economic momentum of the past month, as confirmed by the just released Philly and Empire Fed surveys, which printed at 21.5 and 9.0, smashing expectations of 9.1 and 4 respectively, in fact printing above the highest estimate for both reports, and well above the recent print of 7.6 and 1.5. The one blemish was the sharp drop in labor market conditions at the Empire Fed, which saw a big drop in both employment and hours worked.
First, looking at the Empire Fed, which jumped from 1.5 to 9, we get the following component data:
- Prices paid rose to 22.6 vs 15.5
- New orders rose to 11.4 vs 3.1
- Number of employees fell to -12.2 vs -10.9
- Work hours rose to -7 vs -10.9
- Inventory rose to -13.9 vs -23.6
* * *
The Philly Fed, which soared even more from 7.6 to 21.5, was even more impressive:
- Dec. prices paid rose to 29.4 vs 27.5
- New orders fell to 13.9 vs 18.6
- Employment rose to 6.4 vs -2.6
- Shipments rose to 22.0 vs 19.5
- Delivery time rose to 7.6 vs 6.1
- Inventories fell to 1.1 vs 13.4
- Prices received fell to 5.8 vs 16.0
- Unfilled orders rose to 5.7 vs 4.1
- Average workweek rose to 9.8 vs 7.4
The commentary on the Empire Fed was optimistic with the exception of the labor market which remained weak:
Business activity grew modestly in New York State, according to firms responding to the December 2016 Empire State Manufacturing Survey. The headline general business conditions index climbed eight points to 9.0. The new orders index rose to 11.4, and the shipments index was unchanged at 8.5. Labor market conditions remained weak, with manufacturers reporting declines in employment and hours worked. Inventories continued to fall, and delivery times shortened. The prices paid index rose seven points, pointing to a pickup in input price increases, while the prices received index showed only a slight increase in selling prices. Indexes for the six-month outlook conveyed a high degree of optimism about future conditions, with the index for future business conditions rising to its highest level in nearly five years.
Business Activity Picks Up
Manufacturing firms in New York State reported that business activity expanded in December. The general business conditions index rose eight points to 9.0, its highest level since April. Thirty-two percent of respondents reported that conditions had improved over the month, while 23 percent reported that conditions had worsened. The new orders index climbed eight points to 11.4, indicating that orders increased at a solid clip, and the shipments index held steady at 8.5, pointing to an ongoing increase in shipments. The unfilled orders index edged two points higher to -10.4, and at -7.8, the delivery time index signaled shorter delivery times. The inventories index remained negative, indicating that inventory levels continued to fall, though at a slower pace than last month.
As noted above, labor market conditions remained weak: as in November, both employment indexes remained negative in December. The index for number of employees was little changed at -12.2, a sign that employment levels continued to wane, and the average workweek index, at -7.0, pointed to a decline in hours worked. The prices paid index rose seven points to 22.6, indicating that input price increases accelerated, and the prices received index held steady at 3.5, signaling another small increase in selling prices this month.
That, however, did not dent optimism as Indexes for the six-month outlook strengthened, and suggested that respondents were very optimistic about future conditions. The index for future business conditions shot up twenty points to 50.2, its highest level in nearly five years, with 61 percent of respondents expecting conditions to improve in the months ahead. The index for future new orders climbed eighteen points to 46.7, and the index for future shipments increased fourteen points to 40.1. The index for future employment indicated that firms expected to expand employment significantly. The capital expenditures index climbed nine points to 21.7, and the technology spending index rose four points to 12.2.
* * *
At the Philly Fed it was not so much labor contraction, as a spike in inflation that was the concern. As the report notes, the index for current manufacturing activity in the region increased from a reading of 7.6 in November to 21.5 this month.
Nearly 34 percent of the firms reported increases in activity this month, compared with 24 percent last month. The general activity index has remained positive for five consecutive months, and the activity index reading was the highest since November 2014 . The current new orders and shipments indexes remained positive, reflecting continued growth. The shipments index increased 3 points, while the new orders index fell 5 points. Both the delivery times and unfilled orders indexes were positive for the second consecutive month, suggesting longer delivery times and an increase in unfilled orders.
Firms reported an increase in manufacturing employment and work hours this month. The percentage of firms reporting an increase in employment (17 percent) exceeded the percentage reporting a decrease (11 percent). The current employment index improved 9 points, its first positive reading in 12 months. Firms also reported an increase in work hours this month: The average workweek index, which increased 2 points, has now been positive for two consecutive months.
There was one troubling issue: a sharp jump in cost pressures, i.e., inflation as firms reported increases in the prices paid for inputs. The prices paid index increased 2 points following a 21 point increase last month. Thirty percent of the firms reported higher input prices this month. Most firms (66 percent), however, reported that input prices were unchanged. With respect to prices received for firms’ own manufactured goods, the percentage of firms reporting higher prices (16 percent) remained higher than the percentage reporting lower prices (10 percent), but the index for current prices received fell 10 points.
Like with the Empire Fed, optimism in Philadelphia also soared. The diffusion index for future general activity increased from a reading of 29.3 in November to 52.6 this month. The index is now at its highest reading since January 2015. Nearly 58 percent of the firms now expect increases in activity over the next six months, compared with 36 percent last month. Indexes for future new orders and shipments also showed notable improvement this month, increasing 14 points and 22 points, respectively. In addition, firms marked up their forecasts for employment increases. The future employment diffusion index increased 16 points. Almost 35 percent of the firms expect increases in employment over the next six months, up from 25 percent in November. A notable share of firms (43 percent) indicated that they will increase capital spending over the next six months, and the future capital spending diffusion index increased 15 points.
In Summary, the Philly Business Outlook Survey suggest a pickup in growth for the region’s manufacturing sector. The indexes for general activity, new orders, shipments, and employment all indicated expansion this month. Firms reported an increase in input price pressures over the past two months, but price increases for manufacturers’ own goods were modest in December. Firms’ optimism about future manufacturing growth improved markedly this month. Firms were much more optimistic about future employment as well as capital spending over the first half of next year.
* * *
Overall, very strong reports and if anything very bearish for markets, as they both hint that as Yellen as warned, the economy may be running at potential, which means that any incremental stimulus will require a matching monetary policy tightening which will promptly hits risk assets.