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Economy in Brief

I had some high hopes for the Philly and NY regions that give us our first readings for March. Instead it is some bitter disappointment. Maybe the reports do reflect deteriorated fundamentals. Maybe it is the unseasonable cold weather in the Northeast. Maybe these regions are just not good proxies for the national ISM as they have been failing in that role for several months. Hope springs eternal, but these days so does disappointment.

The chart below plots two lines for the Empire State index. One series is its headline barometer that is a directly surveyed response. The other is weighting of the responses to create a headline comparable to that of the ISM. The Empire State report does not issue such a weighted index. I construct it using ISM like weights. That construction is useful. In this case you can see that Empire State managers are usually more upbeat than their own weighted responses in the survey. In the past when they have not been, the result has been for the survey to pop back strongly the next months. Managers exhibited ‘unrequited pessimism’ last in April 2003 and in May of 2005 – just as they have this month. Each time the drop in the mangers’ response was a false alarm. Is it again?
The Empire State survey also has an outlook index. While the managers have been cutting their outlook it is also true that the ongoing reduction in that outlook has steadied in recent months. Both the weighted index for the outlook (constructed just as the one for current activity) and the current index show the same sort of flattening. For other regions that have an outlook survey and a longer series of available data we find that a reduction in the outlook index is a normal aspect of a maturing economic recovery. 
For another sort of assessment we offer the Empire State data placed in a range according to actual variability of the respective components or simply by ranking and constructing a percentile. We calculate percentile near the bottom of the table to position each component in its range of values or rankings. We find that the weighted index shows a higher reading generally than does the raw monthly barometer. We also find that only three Empire State components are below the 45th percentile of their range- and that is not very weak. Unfortunately those three weak components are: orders, unfilled orders and delivery speeds. Job readings (typically lagging components) are in the top third of their range and hours-worked are in the top 40th percentile of their range. However if we look at the percentile data constructed from rankings, the current observations do look weaker.
Empire State Index Summary
  General New Shipm. Unfilled Delivery Inventory Prices Prices Employ Avg WGHT Outlook
  Business Orders   Orders Time   Paid Received   Hrs Index Index
Mar-07 1.85 3.14 18.54 -8.14 -4.65 -4.65 30.23 10.47 11.37 12.79 5.54 35.17
Feb-07 24.35 18.93 27.07 0.00 -3.23 -7.53 26.88 12.90 12.70 5.38 13.28 38.49
Jan-07 9.13 10.26 16.11 -8.51 -5.32 -19.15 35.11 19.15 6.91 -1.06 4.84 32.54
Dec-06 22.19 22.52 27.60 -14.61 1.12 -7.87 28.09 13.48 18.60 7.87 14.31 41.85
Nov-06 25.00 21.10 26.96 0.00 4.72 3.77 34.90 16.98 23.85 10.38 17.50 36.75
Oct-06 21.19 12.94 22.91 -3.33 -5.00 2.50 30.83 17.50 20.06 14.17 12.04 32.20
Sep-06 15.40 15.37 21.05 -3.00 0.00 -4.00 41.00 16.00 13.28 23.00 11.17 35.89
Averages                        
3mo 11.78 10.78 20.57 -5.55 -4.40 -10.44 30.74 14.17 10.33 5.70 7.89 51.20
6-mo 17.29 14.82 23.20 -5.77 -2.06 -5.49 31.01 15.08 15.58 8.26 11.25 50.83
12-mo 17.63 16.30 21.25 -1.69 0.72 -5.52 37.97 15.49 12.50 10.52 12.13 49.65
Since Jan-02                      
Max 38.9 38.01 44.33 20.83 12.5 8.62 60.58 27.73 23.98 29.17 29.6655 68
Min -17.08 -9.04 -2.59 -19.57 -15.46 -20.62 -5.15 -18.89 -23.15 -11.96 -9.343 31.37
Avg 17.26 17.50 20.34 -1.76 -1.72 -4.11 31.22 4.61 7.01 6.98 10.63 43.02
% of:                        
Range 33.8% 25.9% 45.0% 28.3% 38.7% 54.6% 53.8% 63.0% 73.2% 60.2% 38.1% 10.4%
Ranking 9.5% 7.9% 41.3% 25.4% 39.7% 39.7% 46.0% 49.2% 61.9% 76.2% 28.6% 6.3%
raw rank 57 58 37 47 38 38 34 32 24 15 45 59
out of: 63 63 63 63 63 63 63 63 63 63 63 63
(NOTE: The difference is that the rankings show position that is purely ordinal. The difference between being 63rd and 62nd is one rank, the same as the difference between being 9th and 10th. However, since there are only 63 ranks when we look at the percentiles of the range that weakest entry might represent a sharp drop and larger distance from number 62 than is observation 9 from 10. In this way the percent of range data may make current readings look too strong, that is true if the weakest reading for a series is particularly weak and possibly an outlier. In that case the weak outlier will stretch the range and few observations will seem to be as weak as the weakest. So in using these rankings, take your pick. For our ranking and range assessment purposes, we use data from January 2002 forward since the early Empire State readings seem to have had some flaky responses). 
Summing up
On balance the Empire State report is a weak report, but it may not be as weak as its headline suggests. Its own outlook index shows much less spikiness and only a moderate settling in the outlook profile. And remember that this indicator has a relatively short history going back only to mid-2001. We do not have any observations in it that draw from a period of real weak economic activity.
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