Interesting Regional Fed Surveys

There are two reports that lead one to scratch their head a bit.... First, Empire.

The Empire State Manufacturing Survey indicates that manufacturing activity improved in New York State in December. The general business conditions index rose nine points to 9.5, its highest level since May. The new orders index climbed above zero, to 5.1, and the shipments index advanced eleven points to 20.9. Input price increases steepened, with the prices paid index rising six points to 24.4. Selling prices increased only modestly, with the prices received index inching down to 3.5. Employment indexes were mixed, showing a slight increase in employment levels but a slight decrease in the length of the average workweek. Future indexes rose sharply for a second consecutive month, with the future general business conditions index climbing thirteen points to 52.3, suggesting a return to the high levels of optimism seen earlier in 2011.

This is definitely an interesting report; while the movement above zero was quite marked a big part of it was absorption -- that is, shipments that ate into unfilled orders (which declined sharply) rather than shipments coupled with new orders.

Prices paid remains elevated while received is near zero, supporting one of my primary "trend" themes - margin pressure. And while there was a small increase in hiring the workweek offset it; that's a push.

Forward optimism, however, simply can't be accounted for by any of these measurements. I don't know about that -- the environment in that regard is simply giddy. Thus far, however, it's words rather than deeds, and only deed counts when it comes to the economy and the people in it, so I will wait and see if we translate into deeds.

The Philly Fed Index shows:

The diffusion index of current activity, the survey’s broadest measure of manufacturing conditions, remained positive for the third consecutive month and increased from 3.6 in November to 10.3 (see Chart). The percentage of firms reporting increases in activity (25 percent) exceeded the percentage reporting decreases (15 percent). The index for current new orders showed a similar improvement, increasing 8 points. The shipments index, at 6.7, was mostly flat. Twice as many firms reported declines in inventories (30 percent) as reported increases (15 percent) and the current inventory index fell 22 points to �]14.9. Labor market conditions continue to show overall improvement, but indexes edged down this month. Twenty percent of the firms reported an increase in employment; 10 percent reported a decrease. The current employment index remained positive at 10.7, only 1 point lower than in November. The average workweek index also remained positive but fell nearly 9 points.

In this case we have unfilled orders rising along with new orders while shipments declined slightly on trend, but all were positive. Inventories were being drawn down. And the improvement rate in employment declined while workweek, while remaining barely positive, lost its luster from the previous month.

Again, forward expectations are giddy with the six-month diffusion index of 44.1 (!)

We'll see; the surveys, however, are certainly not "bad" by any stretch of the imagination, but those forward numbers are a bit scary given what's going on over in Europe. A detonation in Europe is likely to lead to a severe inventory and employment glut as it appears that this is considered "fully discounted" in both surveys.

Best of luck with that folks.