Reconciling the New York and Philadelphia manufacturing surveys

On Tuesday, January 16, the general business conditions index in the New York Fed’s Empire State survey of manufacturing plunged 29.2 points to minus 43.7 in the January report. On Thursday, January 18, the Philadelphia Fed’s manufacturing business outlook survey saw its general business conditions index rise 2.2 points to minus 10.6. How to reconcile that two neighboring Fed districts see such different results? And what are the implications for overall conditions in the factory sector?

First to note is that the New York index has a strong tendency to fluctuate month-to-month, sometimes dramatically. It would be a mistake to put too much emphasis on one month’s data. Also, over time the New York and Philadelphia indexes tend to move in the same direction but do not necessarily line up every month. The small improvement in Philadelphia’s index compared to the drop in the New York measure isn’t an unusual divergence.

Second is that these are both diffusion indexes and as such reflect survey respondents’ views of conditions rather than being calculated from detail components. While conditions may feel worse, underlying activity may not be much changed. If you look at the ISM equivalent indexes – calculated from the five components – it smooths out the picture. The New York-ISM equivalent index (50 breakeven) is down 5.7 points to 39.7 in January from 45.3 in December. It’s the weakest reading since 31.2 in April 2020, so, yes, manufacturing in the New York district is in deep contraction. The Philadelphia-ISM equivalent index is down 1.0 point to 43.2 in January from 44.2 in December and is the lowest since 44.0 in April 2023. Conditions are soft for the Philadelphia district, but not materially different from the prior month.

The New York general business conditions index has a so-so correlation (0.708) with the ISM manufacturing index while the Philadelphia index is a bit better (0.754). But these two lag the correlations for the Richmond manufacturing composite index and Dallas Fed general activity index (both 0.796) and Kansas City Fed manufacturing index (0.814).

While regional manufacturing activity in the New York and Philadelphia regions may be soft – mostly due to contraction in new orders – there is more data to come that could alter the picture for the factory sector in January. It may be that specific industries represented in the January survey were particularly hard-hit in the New York and Philadelphia areas, and other districts will have firmer activity. That doesn’t mean that overall manufacturing does not remain in recessionary territory, just that the decline in the New York Fed reading is probably overstated and that conditions in the Philadelphia district remain slow. It will take the complete set of five manufacturing surveys from the district banks to complete the picture. At this point, it seems a good bet that the ISM manufacturing index will remain close to its recent trend level around the 47-mark when the January report is released at 10:00 ET on Thursday, February 1.