Manufacturing Sector Running Out of Steam

The Empire State index unexpectedly decreased to negative 10.4 in September from negative 5.9 in August, according to the New York Federal Reserve's manufacturing survey, which was released on Monday. It's the lowest reading since November 2010.

The Empire State index unexpectedly decreased to negative 10.4 in September from negative 5.9 in August, according to the New York Federal Reserve’s manufacturing survey, which was released on Monday. It’s the lowest reading since November 2010.

The new-orders index worsened to negative 14.0 in September from negative 5.5 in August, while the index gauging the number of employees fell sharply in September but remained slightly above negative territory at 4.3. One bright spot in the report was an increase in a key barometer of future activity, which queries manufacturers about expectations for the next six months. That index rose to 27.2 in September from 15.2 in August.

Though a regional indicator, the Empire State manufacturing survey points to the fact that U.S. manufacturing had suffered lately as demand from other parts of the world slackens. The problems of Europe, and even the slowdown in China—which imports significantly from the U.S., just not nearly as much as it exports to the U.S.—are finally having an impact.

Uncertainty a drag on the economy

A report by released today by the Federal Reserve stressed the role of uncertainty in making a bad economy worse. According to Sylvain Leduc and Zheng Liu, the research advisers at the San Francisco Fed who wrote the report, “Uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis in 2008.”

In other words, more confidence might mean have made the current unemployment rate would instead be around 7 percent or even 6 percent, rather than north of 8 percent. Uncertainty contributes to the vicious circle that keeps the recovery from being more robust: “The private sector responds to rising uncertainty by cutting back spending, leading to a rise in unemployment and reductions in both output and inflation,” the researchers noted.

Moreover, during this down cycle, the central bank’s usual weapon against lack of confidence, namely low interest rates, has lost its sparkle. “Monetary policy makers typically try to mitigate uncertainty’s adverse effects the same way they respond to a fall in aggregate demand, by lowering nominal short-term interest rates,” Leduc and Liu said. “Because nominal rates cannot go significantly lower than their current near-zero level, policy is less able to counteract uncertainty’s negative economic effects.”

FNC says home prices up in August

On Monday FNC released its July Residential Price Index (Composite 100 index), which indicated that U.S. residential property values increased 0.8 percent in July compared to June. The company’s other indexes (10-MSA, 20-MSA, 30-MSA) increased between 0.8 percent and 0.9 percent in July. These indexes are for non-distressed home sales (excluding foreclosure auction sales, REO sales and short sales).

Other housing indicators are due this week, including the NAHB homebuilder survey on Tuesday, and housing starts and existing home sales on Wednesday. If the housing recovery has any legs, these will be mostly positive.

Wall Street took a breather from its recent ECB- and Fed-inspired gains on Monday. The Dow Jones Industrial Average lost 40.27 points, or 0.3 percent, while the S&P 500 was down 0.31 percent and the Nasdaq declined 0.17 percent.