The New York Federal Reserve released the results of its January Empire State Manufacturing Survey today, and the survey’s index fell to the lowest level reported since the covid panic in 2020. Moreover, if we exclude the covid recession, we find that January’s drop in the index is the largest reported in more than thirty years.
According to the New York Fed’s summary:
Business activity dropped sharply in New York State, according to firms responding to the January 2024 Empire State Manufacturing Survey. The headline general business conditions index fell twenty-nine points to -43.7, its lowest reading since May 2020. New orders and shipments also posted sharp declines. Unfilled orders continued to shrink significantly, and delivery times continued to shorten. Inventories edged lower. Employment and the average workweek declined modestly. The pace of input price increases picked up somewhat, while the pace of selling price increases was little changed. While firms expect conditions to improve over the next six months, optimism remained subdued.
Drops of this magnitude have always been connected to recessions in recent decades. With the index more than 43 points into negative territory, the index is down below anything reported during the Great Recession, and it’s well below what we saw with the index during the 2001 “dot-com” recession. Only the covid recession, during which businesses were forced to close, do we find the index at such low levels.
Admittedly, the index can be prone to some sizable one-month swings, but it is notable that the January reading is the second month in a row during which the index fell by a substantial amount. The index fell 23.6 points in the December survey, and then another 29.2 points in the January survey. This is the largest two-month drop since covid, and the first time since covid that a 20-point-plus drop was not followed by a sizable increase.
Given the ongoing worsening of economic indicators (see here, here, and here for some examples) this outsized drop in the index likely points to an expected result of the rapid drops in in the money supply the economy experienced in 2023.
For more, see: “The Money Supply Continues its Biggest Collapse Since the Great Depression“
Without a return to easy money, the manufacturing sector is unlikely to see a resurgence soon. As with so many other sectors in the US economy, the manufacturing sector has made itself heavily reliant on easy money rather than on sound traditional fundamentals. Thus, the future of the sector is tied primarily to Fed policy and easy money. As Nasdaq reported last month, “easing inflation and high expectations of rate cuts in 2024 are likely to bolster conditions for higher manufacturing activity and output.” When it comes to anticipating future prospects, manufacturing firms—many of which are zombie companies or near-zombie companies—the only salvation lies in rate cuts allowing these firms to get their debt back under control and provide access to cheap lending once again. Unfortunately for manufacturers, without that, we are likely to see further deterioration in the manufacturing economy.
