Fed Surveys and Initial Claims Show Positive Results; Industrial Production Remains Weak

By Robert Hughes

Surveys from the New York and Philadelphia Federal Reserve Banks point to robust economic activity and upbeat expectations about the future in their regional economies. The Empire State Manufacturing Survey’s general-business-conditions index shows a net 25.2 percent of respondents said conditions were improving in August. That is a 15.4 percentage-point gain over the 9.8 percent reading from the prior month and the highest level since 2014. New orders, shipments, number of employees, and hours worked all saw improvement over the prior month.

Among the forward-looking indicators were increases in the net percentage of respondents expecting strong business conditions, higher new orders, and higher shipments six months ahead. Furthermore, though the net percentages declined in the latest month for number of employees six months ahead and for capital expenditures six months ahead, both remained positive for the latest month, implying gains in both.

The survey of business leaders at service firms in the New York region shows business activity likely expanded as the net percentage of respondents indicating higher activity rose by 12.4 points to 11.7 percent from −0.7 percent in July. The business-climate index rose by 7.1 points to −6.1 from −13.2. The index for number of employees fell 2.1 points but remained positive at a net 7.5 percentage points, indicating more employees. The wages index posted a small 0.9 percentage-point increase to 33.3 from 23.4 in July. Capital spending remained positive as the net-percentage index fell 0.4 points to 10.9 from 11.2 in July.

Among the forward-looking indicators, the net percentage of respondents expecting higher business activity six months out rose to 31.3 from 28.4 in July while expectations for the general business climate fell slightly to 15.5 from 16.1. Measures of labor expectations moved in opposite directions, though both were solidly positive. Respondents expecting a higher number of employees rose to 28.5 percent while the net percentage expecting higher wages fell to 33.1 percent. Expectations for capital spending also improved, rising to 20.5 percent from 14.6.

The Philadelphia Fed’s survey of manufacturers in that region had mostly positive results for August. The net percentage of respondents experiencing higher general business activity ticked down slightly to a still-favorable 18.9 from 19.5 in the prior month while there were sharp gains in new orders, shipments, unfilled orders, and hours worked.

Among the forward-looking indicators in this report, general business activity, new orders, shipments, unfilled orders, delivery times, prices received, number of employees, and hours worked all rose. Capital expenditures did fall back slightly but stayed at a very strong 39.2 in August.

Initial claims declined in the latest week, to 232,000, down from 244,000 in the prior week. The less volatile four-week average also fell, dropping 500 to 241,000. Claims continue at extraordinarily low levels, supporting the view that the labor market remains quite robust.

Despite all the positive news, industrial production for July was relatively weak. Output rose 0.2 percent for the month and gained 2.2 percent for the 12 months through July. Among the major components, manufacturing output was flat in July and is up just 1.0 percent over the past year. Utility output jumped by 1.6 percent in July but is down 0.6 percent over last July. Variations in monthly utility output are typically driven by weather. Mining output rose 0.5 percent for the month and has a strong 10.2 percent gain over the past year.

The preponderance of data still point to continued economic expansion and a tight labor market, though pockets of weakness continue.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.