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Empire State Index Sends Restaurants the Wrong Message

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Jun. 25 2015, Updated 7:06 p.m. ET

The manufacturing indices

Data from the Empire State Manufacturing Survey and the Philadelphia Federal Reserve’s Business Outlook Survey offer a good indication of how strong the US economy is, based on the state of the manufacturing sector. The manufacturing sector contributes about 12% to the US GDP (gross domestic product). Weakness in this sector can influence the markets, including restaurants.

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Manufacturing data

The Empire State Manufacturing Survey, issued monthly by the Federal Reserve Bank of New York, tells us about the current state of manufacturing in the state. It also provides forward-looking data on 11 indicators specific to New York manufacturers. The Empire State index’s headlining indicator, general business conditions, fell to -2 in June, down from 3.09 in May, indicating a decline in manufacturing activity. The forward-looking general business conditions measure also fell, to 25.8 in June 2015 from 29.8 in May.

The Philadelphia Federal Reserve’s Business Outlook Survey is issued monthly by the Federal Reserve Bank of Philadelphia. It’s similar to the Empire State index and tells us about current business conditions as well as the future outlook.

In contrast to the Empire State index, the Philadelphia index’s headlining indicator, diffusion of current activity, stood at 15.2 in June. This represents a significant increase from a 6.2 reading in the month of May. The future business conditions data also suggest growth, unlike the Empire State index.

How restaurant investors can use this index

The June Philadelphia index stands in opposition to the Empire State index. Since December 2014, both the indices have fallen, as you can see in the chart above. The recent Philadelphia index spike may be a one-off event, so we’ll look at this closely again when it’s next released.

Investors in restaurants should track these two indices closely, as worsening business conditions can deter traffic from restaurants such as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), Shake Shack (SHAK), and Habit Grill (HABT). This would also negatively affect the Consumer Discretionary Select Sector SPDR Fund (XLY), which invests 10% of its holdings in restaurant stocks.

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