• Yesterday’s Empire Manufacturing Index came in weak.
• Today’s retail sales, industrial production, and capacity utilization numbers are due.
• Let’s open the kimono to see why they’re so important.

Good morning from chilly Northern Italy!

America is still the world’s second-largest manufacturer. But it pales in comparison to its former self.

However, since the advent of “nearshoring” - bringing manufacturing back home or close to allies - there’s hope for a resurgence.

Besides, with Janet Yellen telling the world that America can certainly afford two wars, America better get working!

In today’s Rude, we’ll look at yesterday’s Empire Manufacturing Index and today’s industrial production and capacity utilization numbers.

Yesterday’s Empire Manufacturing Index

A Brief Review of the Empire State Manufacturing Index

First, what is it?

The EMSI is a monthly survey of manufacturers in New York state. The Federal Reserve Bank of New York conducts the survey. The bank sends the survey monthly to business leaders representing a wide swath of the manufacturing sector.

The headline number summarizes general business conditions in New York state. The index is widely watched for insights into the state and direction of manufacturing in New York state.

The index measures the health of New York manufacturers relative to a year ago and has been strongly correlated with industrial production nationally since it began in 1982.

Empire is essential but not as widely trusted as the Philly Fed because the Philly Fed covers more manufacturing in the US.

Second, let’s see how it’s calculated:

The general business conditions index and the indexes for the other 11 indicators are calculated by adding the percentage of "increase" responses and then subtracting the percentage of "decrease" responses.

If 30% of survey respondents marked "increase," 50% chose "no change," and 20% picked "decrease," then the index would show a reading of 10. Index readings are released as absolute numbers to one place after the decimal point.

With that said, let’s see what happened in the September survey.

Credit: The Federal Reserve Bank of New York

What’s interesting is that the red line (what’s expected in six months) is perpetually better than what the actual number is month to month.

It seems like New York’s manufacturing managers are smoking the hopium.

From The Federal Reserve Bank of New York:

Business activity edged lower in New York State, according to firms responding to the October 2023 Empire State Manufacturing Survey. The headline general business conditions index fell seven points to -4.6. New orders fell slightly, while shipments were little changed. Unfilled orders declined, and delivery times shortened. Inventories held steady. Labor market indicators pointed to a slight increase in both employment and the average workweek.

Here’s a summary of the numbers.

For whom and why does this matter?

1. Investors: The ESMI serves as an early indicator of manufacturing activity and economic health, aiding investors in making informed decisions.

2. Policy Makers: Armed with the insights from the ESMI, policymakers can tailor fiscal and monetary policies to foster a conducive environment for economic growth.

3. Academics and Economists: The index provides a rich dataset for academic inquiry, helping economists model and forecast economic trends.

In short, we can see where things are and where policymakers and investors would like to take them.

Next, let’s look at industrial production.

Today’s Industrial Production

Expanding on manufacturing, industrial production includes mining and utilities.

The Anatomy of Industrial Production Data

1. Components and Coverage:

• Manufacturing: The largest component, encompassing the production of goods ranging from the behemoth machines that grace our skies to the minuscule silicon chips that power our modern lives.

• Mining: My friend and colleague Byron King’s specialty, this sector includes the extraction of minerals and resources essential for many industries.

• Utilities: The lifeblood of modern civilization, utilities cover the generation and distribution of electricity, gas, and water.

2. Calculations and Indices: Industrial production is often measured using an index where a particular year is used as the base year. The base year used now is 2017.

Credit: FRED

3. Adjustments: Seasonal adjustments are often made to account for the variations that occur regularly at the same time each year—think of the surge in candy production before Halloween or the dip in car manufacturing during the festive season.

4. Capacity Utilization: Alongside the raw production data, capacity utilization figures are often released. This metric shows how effectively the industrial capacities are being used and is a significant indicator of economic health. We’ll expand on capacity utilization later.

The Impetus Behind Monthly Reporting

The cadence of monthly reporting isn’t arbitrarily chosen. It provides a near real-time snapshot, enabling a timely response from policymakers and the market. This frequency allows for a more agile approach to assessing the economic trajectory and making informed decisions accordingly.

The Echoes of Industrial Production on Broader Economies

The ramifications of fluctuations in industrial production reverberate far beyond the factory gates.

A rise often heralds economic growth, increased employment, and buoyant consumer sentiment.

Conversely, a decline could spell economic trouble, triggering a domino effect of reduced income, lowered spending, and tightening financial conditions.

The market is looking for a slight 0.1% increase in industrial production for September, down from August’s 0.4% increase.

Today’s Capacity Utilization

In the realm of economic indicators, Capacity Utilization - Cap Ut: pronounced YOOT as in someone from Utah or My Cousin Vinny mispronouncing “youth” - stands as a stalwart sentinel, shedding light on the operational efficiency and economic health of a nation's industrial sector.

It's a metric that highlights how effectively the existing infrastructural capacities are employed in manufacturing, mining, and utilities.

As such, a deeper understanding of Capacity Utilization can offer a window into a nation's economic vigor and potential future trajectory.

Cap Ut is calculated simply as Actual Output / Potential Output x 100.

Actual Output represents the actual production levels achieved by the industrial facilities. Potential Output denotes the maximum possible production levels achieved should all facilities operate at full throttle.

If Cap Ut numbers are too hot, that could indicate a recession. But at 79%, that’s not a worry here.

The market is looking for an unchanged number this month (79.7%).

Today’s Retail Sales

I just wanted to mention retail sales, as that comes out today as well. Economists are looking for a flat number of around 0.2%, down from last month’s 0.6%.

If it surprises to the upside, Jay Powell may reconsider his rate hiking position.

Wrap Up

Today’s a busy one when it comes to economic numbers.

I’m not sure how much impact it’ll have on the markets. We’ll need to wait and see.

Have a great day!