Can manufacturing activity in the northeast increase the pace?

New York Fed’s Empire State Manufacturing General Business Conditions Index and Philadelphia Fed’s Business Outlook Survey

The New York Fed released the results of the Empire State Manufacturing General Business Conditions Index for the month of June, on Monday, June 16. The index reading came in at 19.3—slightly higher than May, and ahead of consensus estimates of 15. Last month’s level of 19, was the index’s highest reading in almost four years.

This month’s reading was boosted by the critical sub-indices of new orders and gains in employment levels and hours worked. The new orders sub-index reading reached a four-year high at 18.4. Slowing prices for both inputs and finished goods were one of the report’s negatives. Survey respondents were extremely optimistic regarding future business conditions, with future new orders and shipments sub-indices recording strong gains.

What is the Empire State Manufacturing General Business Conditions Index?

Conducted by the New York Fed, the Empire State Manufacturing General Business Conditions Index is a monthly survey of manufacturers in New York state across a cross-section of industries. The survey questionnaire quizzes participants primarily on manufacturing activity, new orders, inventories, hiring activity, and changes in prices paid for purchases and prices received for sales and business outlook for the next six months. The base score for the index is zero. Any reading above zero indicates an improving business outlook, whereas a negative score (for example—one that comes in below zero) indicates that business conditions worsened.

Philadelphia Fed’s Business Outlook Survey

The Philadelphia Fed will release the results of its Business Outlook Survey for June, on Thursday, June 19. Last month, the survey reading was slightly down to 15.4 from April’s 16.6, although manufacturers reported growth—at a slower pace. Critical readings of general activity, new orders, and shipments increased for the third month in a row, while strong employment gains were also seen in the month of May. Businesses also remained optimistic about the outlook for the next six months. Firms also reported price pressures both on finished goods as well as on inputs. The prices received index increased to its highest level since May, 2011.

What is the Philadelphia Fed’s Business Outlook Survey?  

The Business Outlook Survey is a monthly survey of manufacturers conducted by the Federal Reserve Bank of Philadelphia. Survey participants indicate the direction of change in overall business activity and in the various measures of activity at their plants—employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received. Primarily a manufacturing survey, it precedes the index of industrial production by nearly three weeks. It’s known as a leading manufacturing indicator.

Outlook and investor impact

Manufacturing survey readings have posted strong gains throughout most of the country, since the onset of spring. As the year moves on, the rate of growth can be expected to moderate, resulting in lower readings and growth at a decelerating pace.

Investors can invest in manufacturing sector companies by investing in ETFs like the SPDR Industry Select Sector ETF (XLI) and the Vanguard Industrials ETF (VIS). Both XLI and VIS have investments in blue-chip industrial conglomerates like General Electric (GE) and United Technologies. Both General Electric (GE) and United Technologies are part of the iShares S&P 100 ETF (OEF) which tracks the S&P 100 Index.

For fixed income investors, better manufacturing numbers would mean economic growth is gaining traction, which generally tends to reduce bond yields. However, the demand for quality low-risk assets in the midst of geopolitical risks abroad has decreased yields for U.S. bonds. Ten-year Treasury yields have declined by 40 basis points since the start of the year. The iShares 10–20 Year Treasury Bond ETF (TLH) has returned 8.16% year-to-date (or YTD) as a consequence.

While this may prove unsustainable as the year progresses and the Fed begins rate hikes (expected in 2015), fixed income investments have performed better than expected so far this year.