Trouble for the U.S. economy? Empire State gauge sinks to lowest level since pandemic.

Trouble for the U.S. economy? Empire State gauge sinks to lowest level since pandemic.

New York Fed’s business-conditions index tumbles to negative 43.7, lowest since May 2020

The numbers: A survey of business conditions in the New York region sank in January to the lowest level since the onset of the coronavirus pandemic in 2020, perhaps a sign of trouble brewing for the U.S. economy.

The New York Federal Reserve’s Empire State business-conditions index, a gauge of manufacturing activity, plunged 29.2 points to negative 43.7, the regional Fed bank said Tuesday.

It’s the second-lowest reading ever. The biggest drop took place in the depths of the pandemic, in May 2020.

Economists had expected a negative-4 reading, according to a survey by the Wall Street Journal. Any number below zero indicates deteriorating conditions.

Over the past two months, the index has plummeted 58.2 points, largely because of a decline in new orders. Orders provide an indication of future business activity.

The latest reading is even lower than at any time during the severe 2007-09 recession.

Yet big declines, historically. in the Empire State index tend to be short-lived.

Key details: The index for new orders dropped 38.1 points to negative 49.4 in January. Shipments fell 24.9 points to negative 31.3 points.

Unfilled orders continued to shrink significantly, and delivery times have shortened, which usually happens when business dries up. Employment and hours worked also contracted.

Optimism about the next six months picked up but in a subdued manner. The index for future business conditions climbed 7 points to 18.8.

Another positive in an otherwise dismal report was an improvement in investment plans. The capital-spending index increased 10 points to 13.7.

Big picture: The surprise decline adds doubts about the U.S. manufacturing sector, which has been struggling over the past year as interest rates have risen. The key national ISM factory index shows the sector has contracted for 14 straight months.

The negative results will put more focus on the Philadelphia Fed’s manufacturing index, which is set to be released Thursday. The ISM factory index will be released on Feb. 1.

What the New York Fed said: “This outsized drop suggests January was a difficult month for New York manufacturers, with employment and hours worked also contracting,” said Richard Deitz, economic research adviser at the New York Fed.

What economists are saying? “Startling but not definitive,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“The plunge in the headline index will no doubt generate alarmist headlines, but remember that the month-to-month swings in the regional Fed manufacturing surveys are mostly noise,” he added.

Market reaction: Stocks opened lower on Tuesday, while the 10-year Treasury yield rose to 4% in early morning trading.

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