New York manufacturing contraction adds fuel for rate cut

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Business activity in New York contracted in June, as tariffs and a slight softening in the labor market took a toll on conditions.

The Empire State Manufacturing Survey’s general business conditions index plunged 26 points, its biggest monthly drop, to negative 8.6. This was the first time in more than two year the index showed contraction.

The future conditions index also fell, less severely, to 25.7 from 30.6.

Economists had predicted continued expansion, with those polled by IFR Markets expecting a positive 11.0 reading, so contraction will increase calls for a Federal Reserve rate cut ahead of this week’s meeting.

Fed Chair Jerome Powell has repeatedly said one month of data for one indicator does not spur a change in Fed policy, Manufacturing has been weak, and when combined with inflation still below 2% and a seeming softening of the labor market, and a dip in consumer sentiment, the market has priced in two rate cuts this year. No movement is expected at this week's meeting, but indications of future rate cuts are expected.

The number of employees index also dropped, falling to negative 3.5 — its first negative reading in two years — from 4.7, while the future dipped to 15.6 from 16.3. The average workweek was also in negative territory.

“Declines were broad-based and were led by new orders, unfilled orders and shipments,” said Scott Anderson, chief economist at Bank of the West Economics. “On a brighter note, while the six-month ahead outlook fell by nearly five points to 25.7, it is still modestly above the six-month average of 24.7. The sharp deterioration in the Empire Manufacturing index in June suggests the trade war escalation is negatively impacting manufacturers in the New York region.”

Even before the Empire State report, Stifel Chief Economist Lindsey Piegza said, "investors can expect a softer tone from the Fed, opening the door for a rate reduction in the coming months."

Housing market
Builders’ confidence in the market for new single-family homes slid as the National Association of Home Builders' housing market index declined to 64 in June from 66 in May. This was the index’s first drop since December.

IFR's poll of economists predicted the index would be 67.

"Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers,” according to NAHB Chief Economist Robert Dietz. “And while new home sales picked up in March and April, builders continue to grapple with excessive regulations, a shortage of lots and lack of skilled labor that are hurting affordability and depressing supply.”

The number “is consistent with our expectation of a continued recovery of the new home market from winter lows,” said Mark Palim, deputy chief economist at Fannie Mae. “The overall level relative to last year and last month supports our forecast, released this morning, of no year-over-year growth in single-family starts for 2019 along with our projection of a 1% increase in total home sales this year.”

“Heightened economic uncertainty, high construction costs, and the lack of skilled labor all weighed on homebuilder confidence,” Bank of the West's Anderson said.

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Economic indicators Monetary policy Manufacturing industry Federal Reserve Bank of New York