The first question in looking at the grim trend of decay that screams out from today’s update of the Empire State Manufacturing Survey is whether the news should be taken seriously. Pairing this numerical incarnation of negativity with competing measures of the national economy raise a conflict, effectively pitting optimism against its ancient rival of despair.

But should we really take one state’s apparent decline and fall as a sign of the times? Although minds differ on the answer, there’s no debating the sharp drop in April for this measure of New York state manufacturing activity. “The general business conditions index dropped fairly sharply for the second month in a row, to a level of -11.1—its lowest reading since April 2003,” the report advises. What’s more, measures of both new and unfilled orders also fell into negative terrain; the shipments gauge remained near zero; and the index of employee totals dropped to its lowest mark in over two-and-a-half years. To quote the technical term that describes this pile of economic data: Ouch!
Or so one would think. But optimists aren’t so easily swayed. That includes David Resler, chief economist with Nomura Securities in New York. In a research note distributed today, he effectively dismissed the Empire State Index’s warning as something less than compelling. In fact, he all but labeled it misleading. Yes, the yardstick fell sharply to –11 from 2, but that’s not necessarily a reason to worry, Resler wrote:
“If its results had not been so discredited last month when it fell to 3 (now revised) from 20, the implied slowdown, and its rapidity would be significant. However, there was no validation of this index’s decline in April, in other regional surveys, the ISM index or the Federal Reserve’s beige book and we assume the same lack of correlation with be evident in those same releases for May. Similarly the macro-data, from retail sales, to employment and initial claims, provide no validation of the Empire Index either.”
Overall, the Empire Index’s drop is “more perplexing than it is worrisome,” Resler concluded. Chalk it up as an anomaly as opposed to a warning for the national economic scene.
Indeed, a report released earlier this month from the Federal Reserve Bank of Philadelphia backs up Resler’s optimism. Coincident indexes measuring the first quarter of 2005 of economic activity for each of the 50 states shows growth is by far the dominant state of affairs around the country. The indexes increased in 46 states and declined in only four, a press release dated May 5 announced.
Although first-quarter surveys are dated material compared with the Empire Index’s update on April activity, Mr. Market seems inclined to take the bullish side of the story today. The S&P 500 rose 1% today, hardly giving the Empire Index a passing glance. The benchmark 10-year Treasury Note yield yawned, remaining essentially unchanged at roughly 4.15%. Not even the formerly shaky dollar finds reason to turn tail and assume the worst today. Rather, the U.S. Dollar Index for a time tested new highs this year as the bias for expecting growth will overwhelm any counter trends, anomalous or otherwise, before pulling back to settle slightly up on the day.
But some take a darker perspective nonetheless. “This is awful,” Ian Shepherdson, chief economist at High Frequency Economics LLC in Valhalla, New York, says of today’s Empire Index news in an interview with Bloomberg News. “The survey is much weaker than we expected, and it supports our view that the soft patch is not over.”
Shepherdson seemed to be in the minority today, but there’s still reason to sleep with one eye open. The Treasury today reported that investors the world over in March consumed U.S. assets at the slowest rate in more than 18 months. Net foreign purchases of U.S. securities totaled $45.7 billion in March, down by 45% from February. Is this a sign that the red ink in the federal budget and trade deficits, which have been rising in recent years, are starting to give foreigners pause about holding more American paper assets?
Well, we’ve seen warning signs of this ilk come and go before with nary a burp. Why should this time be any different?
American economic growth, or lack thereof, will ultimately bring the answer. As always, that answer comes in individually wrapped dosages. And no dosage is likely to have greater weight on investor sentiment, domestic or foreign, these days than the numbers emanating from real estate, which is arguably the last, great remaining prop of consumer optimism.
On that front, tomorrow brings news of April’s housing starts and building permits, reports that will help us answer the pressing question: Is Joe Sixpack and his extended family still intent on taking out a new loan to buy another investment condo in Florida? The retort will be dispatched tomorrow, to a degree. With any luck, it’ll go a long way in helping investors decide whether dismissing such metrics as the Empire Index is truly enlightened or deserving of a less-forgiving epithet.