May’s first reading on regional manufacturing activity out of New York showed significant deterioration. The New York Fed’s Empire State Manufacturing survey’s headline index dropped from a solid reading of 24.6 last month down to -11.6 in May. That is only slightly above the low from two months ago that had marked the first significant contraction in activity since the spring of 2020.

Not only are General Business Conditions back into contractionary territory, but the double-digit negative reading sits in the bottom decile of all months on record going back to the start of the index in 2001. That compares to last month’s reading which was just shy of the top decile. Given the total reversal within the historical range, the month-over-month decline of 36.2 points is now the second-largest one-month drop on record behind the 56.7 point decline in April 2020.

Only New Orders and Shipments fell enough to reach contractionary levels this month, but most other categories also saw large month-over-month declines. Expectations similarly saw broad declines, however, the categories that saw the biggest deteriorations in current conditions (General Business Conditions, New Orders, and Shipments) saw improvements in six-month expectations.

As previously mentioned, the most shocking declines were in demand-related categories, namely New Orders and Shipments. These two indices fell by 33.9 and 49.9 points, respectively. For New Orders, that was the third-largest decline on record outside of the 56-point drop in April 2020 and a 43.1-point decline in the wake of September 11, 2001. The only larger decline in Shipments happened, again, in April 2020. Unfilled Orders also fell dramatically, though the month-over-month decline was not as close to a record, and the actual level of the index is still relatively elevated in the top quartile of its historical range. Although more New York area firms reported declines in new orders and shipments, expectations were each higher month-over-month following sharp declines leading into this month’s report.

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Perhaps in part due to that slowdown in demand, Delivery Times continue to decelerate with the index dropping another 1.6 points. That follows a much larger double-digit decline in April. In what could be either a positive sign as a result of finally alleviated supply chains or a negative sign given slowing demand, responding firms also reported that they expect delivery times to finally decline in six months. That was the first negative reading in expectations since October 2020.

Additionally, inflationary pressures appear to be easing as both indices for Prices Paid and Received declined across current conditions and 6-month expectations. Those declines are only small dents in what have been extremely strong runs over the past two years.

Perhaps the only silver lining in this month’s report was in regards to employment. New York area firms accelerated both net hiring and the average workweek. Again though, expectations were less optimistic as those indices continue to roll over alongside plans for Technology Spending and Capital Expenditures. In other words, the employment situation may have improved in May, but that is not expected to improve dramatically in the months ahead as demand has weakened.  

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