Empire State Manufacturing Index Beats Expectations

The Empire State Manufacturing Index for April 2023 shows a significant rebound in business activity in New York State, marking the first increase in five months.

The headline general business conditions index rose to 10.8, with substantial increases in new orders and shipments. However, this positive development comes with potential consequences, including inflationary pressures.

Economic Benefits

The surge in the general business conditions index indicates a modest increase in activity. With 35% of respondents reporting improved conditions, the index's increase can help stimulate the economy through higher production and consumption.

The new orders and shipments indexes also saw significant growth, with both increasing substantially after months of decline. This growth may lead to higher revenues and profits for manufacturing firms in the region, as well as a potential increase in overall economic growth.

Inflationary Pressures

While the growth in business activity can be beneficial for the economy, it can also contribute to inflationary pressures. The prices paid index dropped to 33.0, indicating a moderation in input price increases.

The prices received index remained steady at 23.7, suggesting that selling price increases have not slowed down. As production and consumption increase, firms may face higher input costs, which could translate into higher prices for consumers. Persistent inflationary pressures can lead to higher costs of living and reduced purchasing power for consumers, potentially harming the economy in the long run.

Labor Market Indicators

Despite the overall positive outlook, the labor market remains weak. The index for the number of employees and the average workweek index both stayed negative, indicating a decline in employment and hours worked. This issue may hinder the growth and recovery of the economy, as higher unemployment rates can lead to lower consumer spending and reduced economic activity.

Future Outlook

Firms remain cautious about the future, with the index for future business conditions at 6.6, suggesting little expected improvement over the next six months. New orders and shipments are anticipated to increase modestly, with employment also expected to grow. Capital spending and technology spending indexes indicate a slight rise, which could lead to increased investment in these areas.

Closing Thoughts

The Empire State Manufacturing Index's significant beat in April 2023 shows promising signs for economic growth in New York State, which is a bellwether for manufacturing activity in the US, therefore there may be broader implications. We will certainly be watching for confirmation elsewhere.

However, this boost in business activity comes with some degree of potential inflationary pressures continuing contrasted by labor market weakness. An interesting dichotomy to be sure, as inflationary pressure should benefit from a weakening labor market in the longer run.