Several reports released today indicate economic conditions have improved over the course of the last month. In addition to news that producer prices have eased, mostly on lower energy costs, we also learned that manufacturing activity in the New York region “held steady,” as opposed to contracting as it had for the previous five months, and retail sales grew faster than expected.
First, general business conditions rose from -8.5 in October to +0.6 in the Empire State Manufacturing Index produced by the Federal Reserve Bank of New York. Looking beyond the headline number the report was mixed. The index for shipments rose from 5.3 to 9.4, indicating an increase in the pace of growth, but in other areas there remain some weaknesses. For instance, measures for new orders, unfilled orders, inventories and employment were negative. The new orders figure shifted from +0.16 to -2.07.
In essence, the “improvement” seen in these numbers is mostly that conditions did not worsen. One element which factors into these figures is the situation in Europe. Exports to Europe are a significant portion of the state’s exports – about one-third – which is putting a major dent in the region’s production and sales.
With that said, respondents to this survey were overwhelming positive when it comes to predicting manufacturing activity over the next six months. The forward-looking general business conditions index jumped from 6.7 in October to 39.0 in November – its highest level since May. Measures for new orders, shipments, employment and capital expenditures were strong, suggesting that manufacturers expect for overall manufacturing activity to improve significantly in 2012.
Second, retail sales were up 0.5 percent in October, building on the 1.1 percent gain in September. Among the sectors experiencing the fastest growth in sales were electronics and appliances (up 3.7 percent), building materials (up 1.5 percent), nonstore retailers (up 1.5 percent), sporting goods and hobbies (up 1.3 percent) and food and beverages (up 1.1 percent). Areas with declines included furniture and home furnishings (down 0.7 percent), clothing and accessories (down 0.7 percent) and gasoline stations (down 0.4 percent); however, each of these categories has experienced year-over-year gains in retail sales.
Growth in retail sales is up 7.2 percent since October 2010, with year-over-year growth rates slowing from earlier in the year. When you exclude automobile and gasoline sales, the growth rate is 6.1 percent, which is about what it has been for the past six months.
Overall, these figures show that the consumer is still spending despite continued pessimism on opinion surveys. Previous indicators have said the same, with individuals perhaps dipping into savings to make their purchases. Future growth in retail sales will hinge on pocket-book issues such as increases in employment and income. While consumption made large contributions to the most recent real GDP figures, it will be difficult to sustain that momentum without greater improvements in the macroeconomy.
Finally, the Census Bureau reported that business inventories were unchanged in September, with overall sales up 0.6 percent. For manufacturers, sales grew 0.3 percent, with inventories increasing 0.1 percent. Year-over-year numbers have been more substantial, with sales and inventories rising 11.6 and 11.8 percent, respectively. Businesses have done an excellent job of controlling their inventories, and as such, the manufacturing inventory-to-sales ratio remains unchanged at 1.33.
Chad Moutray is chief economist, National Association of Manufacturers.