Wednesday, February 18, 2015

Business Climate Is Worse, But Leaders Remain Optimistic

This is a follow up post to our post entitled Contraction? Empire State Manufacturing Index Back To Early Recession Levels, as published in SeekingAlpha this morning. The article compares the Empire State Manufacturing Index for February 2015 to the December 2007 index level which was the official start of the recession. We found that both the current and futures index are lower than they were in Dec. 2007, but does that mean the market isn't doing well in a post-QE world? Perhaps the Business Leaders Survey for 2015, also sent out by the New York Fed to regional manufacturers and service firms, can shed some light.

Released this morning at 8:30 am, the survey’s headline index fell 15 points to 0.8 and the business climate index fell as well. On average, according to the report, "...respondents viewed the business climate as worse than normal." However, the index for future business activity climbed up two points to 37.4, and the index for future business climate is up seven points to 33.3.

In the Supplemental Survey Report the Fed asked respondents:
To what extent do you expect your firm’s spending on new plant and equipment to be higher or lower this year than last? How do you expect each of these capital spending categories to change?
According to the report the number of business leaders planning to hike spending greatly outnumbered those expecting to reduce spending by a margin of 38 to 25 percent, among service sector firms, and 41 to 22 percent among manufacturers.

Bottom line: Signs are pointing south from a technical or operational perspective, and while business leaders acknowledge that the business climate is worse than normal, they are optimistic, evidenced by the number willing to increase capital spending compared to this time last year. Only time will tell if QE cuts helped the economy or prolonged the inevitable, meanwhile financial leaders are growing anxious about the fed-funds rate.

The FOMC is testing a series of term reverse repurchase agreements, through the FRB of New York from mid-February through early March as a potential way to control the fed-funds rate in the absence of QE. Look for a follow-up post on the effect of these tests shortly.