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The Empire State Manufacturing index is a second-string economic report, not on par with the main “roster” of reports we get on GDP, employment, retail sales or inflation.
It’s kind of like preseason NFL football, actually. You normally don’t need to pay too much attention, because the scores don’t matter and many of the guys battling it out on the gridiron right now will be out of a job come Labor Day.
But every once in a while, something strange happens. You get a reading that’s so out of the ordinary … so shockingly bad … that you have to sit up and take notice. That’s precisely what we got today.
Specifically, the Empire Fed index collapsed to NEGATIVE 14.9 in August from positive 3.9 in July. That was much, much worse than the average forecast of +4.5… the third drop in the last five months … and most importantly, the worst reading since April 2009.
Yes, April 2009. The tail end of the last recession. A month where the Dow Jones Industrial Average was going for around 8,000. It wasn’t just the headline number that stunk up the joint, either. Sub-indices that track new orders, shipments, inventories and employee workweeks all plunged into negative territory.
This is what it looks like in chart format. That shaded area from 2008-09 represents the last recession. So basically, this number is so bad that it’s typically something you see only when the economy is shrinking.
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| Source: Federal Reserve Bank of New York |
So what’s going on? Well, let’s go through the challenges we’re facing one by one:
The energy sector is in the midst of a nasty pullback, with layoffs, bankruptcies and investment all plunging …
Several emerging-market currencies, stock markets and economies are collapsing, with some declining at their fastest rates in decades …
The dollar has been rallying for several quarters, and China is now devaluing its currency. That puts U.S. multinationals and manufacturers at a big disadvantage versus foreign competitors.
As a matter of fact, the Atlanta Federal Reserve publishes a “GDPNow” indicator that is updated frequently as new data comes in. Its latest estimate for GDP growth in the current quarter? A pathetic 0.7%. That would be a major slowdown from 2.3% in the second quarter — and far below the average “expert” prediction of economists, currently 2.6%.
In short, it’s not just one minor problem or threat the economy is up against. It’s several converging at one time. That’s why this Empire index reading is worth paying attention to. IF it’s a harbinger of what’s to come from bigger, more widely followed reports, the stock market could be in for even rougher sledding.
So what do you think? Is the Empire reading something to worry about? Or a tempest in a teapot? Do you think the problems overseas are going to wash up on our shores, and that will hurt the broad averages? Or will we remain relatively healthy even as the rest of the globe catches an economic cold? Let me know at the Money and Markets website.
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It’s a new week, but many of last week’s worries are still weighing heavily on investors like you. There’s definitely a higher level of concern about the stock market now than we’ve seen in some time, and in my opinion, for good reason.
Reader T. said: “U.S. markets can only hold up so long – and will start crashing or at least declining in September, I think. There’s much skepticism, so there is an ability for markets to ‘climb the Wall of Worry.” But it’s not worried enough with the VIX around 13 – my read on it for now.”
Reader Novice T. added: “I am buying some inverse 3X ETFs like SPXS, YANG, NUGT. Start collecting as insurance and take profit on some, if any, opportunity and keeping some for the major correction.
“At the beginning of the year, I had 75% invested in stocks. Now I have only 35%. With a six-year bull market, one has to know when to take profit and be ready for ‘bottom fishing’ when the market correction is a year or more old.”
Reader Henry A. also said: “The foreign market deterioration was predictable. The Third World has been borrowing cheap U.S. dollars, doing the carry trade, for development. And now, they will be paying their debt with expensive U.S. dollars. Things will get much worse before they get better.”
But Reader Tom suggested there may be some opportunity out there, saying: “Let me be the contrarian here. While Mike and others are saying dump stocks, I say buy into high-quality stocks with not a lot of China exposure. Google (GOOGL) comes to mind. This is a great buying opportunity if you know the right stocks to look for.”
It’s always nice to hear differing opinions, so thanks for weighing in, Tom. But it should be clear from my recent columns that I’m more aligned with what Henry A., Novice T. and others are saying right now.
More and more global markets are outright crashing. Yet U.S. stock investors are just going along their merry way as if nothing’s happening. That kind of dichotomy is hard to maintain for long, and I’m very concerned our markets are doomed to play “catch down” soon. We shall see.
Any comments you’d like to add? Then don’t miss out. The website is there as your outlet. I hope to hear from you soon.
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The emerging-market meltdown I wrote about last week continued overnight, with EM currencies collectively suffering their worst declines since 2000. Turkey, Malaysia, and Brazil led the latest slump. So I will pose the question again: How can the U.S. remain an island of prosperity in a sea of market sickness?
How much pain and volatility is China’s economic slowdown causing? Quite a bit, as last week’s currency devaluation demonstrated. After all, the yuan move was meant as a form of economic stimulus.
The Wall Street Journal goes into more detail in this story from late yesterday, noting the wide range of U.S. corporations warning about China weakness and the impact on their earnings. It lists everyone from Weyerhaeuser (WY) to Cummins (CMI) to Juniper Networks (JNPR) as victims of the slowdown.
Liberty Interactive Corp. (QVCB) agreed to buy Zulily (ZU) for $2.4 billion, adding the online retailer to its home shopping network empire. Liberty is the parent company of long-time retail company QVC, while Zulily is a 5-year-old upstart whose shares have struggled in the past several months.
An Indonesian airplane carrying 54 people crashed in a remote region of that island nation, and a combination of rugged terrain and lousy weather is making recovery efforts difficult. Indonesia has a history of accidents and crashes, and the Trigana Air Service company that owned the plane in question is banned from flying in Europe due to safety concerns.
Any thoughts on the latest bout of EM weakness, and the implications for our markets here in the U.S.? What about the latest deal in online retailing … is the combined QVC/Zulily company a bigger threat to the likes of Amazon.com (AMZN)? Let me hear about these or other topics online and I’ll do my best to address your comments and questions.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 37 comments }
Mike, just over a month ago (after oil’s Dead Cat bounce from $45 to $60 you proclaimed “oil is in a bull market”..With oil back at $40 what about your “bull market” call now ? Is this just a correction, in your new “bull market”..You’ve been very quiet on this topic ;)
Good question! Jim
Mike, no one follows the Hebrew Sabattical calendar anymore., but each 7 year or “Jubilee” has shown a marked resign recently. Examples are 2001 and 2008. This Sept.
13, 2015 marks another start of Jubilee(shemitah, or the 29 th of ELUL , year 5775 of
The Jewish calendar). If history repeats, then we will enter a marked downturn after
Sept. 13, 2015. I think God is a better forecastor of coming events than anyone else.
Gary,can you please put in a good word for me,please
I totally agree, just finished reading “The Mystery of the Shemitah”, a book authored by Johnathan Cahn. If you have not read it, read it before September 13, this year. Some big things may take place, and I am not speaking only of the economy.
Is this part of The Blood Moon prophecy? Jim
The “Market” (however you define it) went up for the past five years despite all the various measurement indexes of the economy saying the contrary. The triumph of hope over fact ignored the 800 lb gorilla in the room, government policies at all levels. Will the forthcoming elections bring relief? Sorry, but I’m betting with those buying put options and negative indexes.
To the question will slow downs come to rest on US or is the emerging markets going to
bare the brunt of the projected pullbacks? Those I read indicate the currency wars are
on full scale. The oil revenue dependent Putin who is waging war on the west is hard
pressed to keep his economy afloat while conducting currency, cold war and building
atomic arsenal. American oil production is bolstering the the world supply which helps
keep oil price low or falling. Europe has just turned up the printing presses (money by
the tons.) We know where this goes. i.e. US FED. Japan is expect to completely fall
apart after Europe crash followed by the USA, All along the way. The emerging markets
sink and sink. While the middle east Keeps killing and killing. Pakistan has the winning
score card there. Only God knows the outcome. For me and mine we follow the Lord
Jesus Christ. Suggest Your consider Christ. If you need faith help please write.
Thank You with all due respect. James V. Clark
I’m puzzled by a noticeable increase of buying…..yes buying by insiders in the past few weeks.
The “Donald Trump Effect” that is the non-specific anger of large numbers of our citizens is more broadly based than simply the Republican primary candidates. This to me is becoming a generic sort of index of frustration. Someone should figure out a way to quantify this. I bet it it would help explain some things or confirm them.
I have run some calculations. Together with the planetary effect of Jupiter, Trumps ascendancy is correlated with a decline in the U.S. Market (although not linearly so). While speculative, part of this effect can be attributed to negativity, prejudice, and skepticism, whereby market participants become too depressed to invest. Call it the anti-Buffett effect.
I don’t think it is anger. It’s so irrational it must be fear. Jim
HI MIKE,
I APPRECIATE YOU LETTERS AND INSIGHT ON THE ECONOMY.
WITH MOST OF THE ECONOMIC NEWS SO NEGATIVE WORLD WIDE, THIS IS THE TIME TO BE VERY CAUTIOUS . I HAVE BEEN PLANNING ALL YEAR TO REDUCE MY EQUITY HOLDINGS AND WAIT FOR SIGNAL FROM YOU BEFORE I DO ANY MORE INVESTING. I PLAN TO GO TO 100% CASH IN MY IRA BY MID SEPTEMBER IF NOT BEFORE.
D e f l a t i o n is what is going on so expect Q E 4 or 5 or whatever they want to call it .. this TITANIC is going down . .. cherry pick good companies that PAY DIVIDENDS and pray and ask GOD for good Christian leaders here in America and most places all over the world.
Buying great blue chip companies will Always make you a winner…long term , try Boeing .
Good thinking!
Empire Index. Excellent report. The trend is set. nO denying it now. I am buying SH Nov.puts. Many thanks.
Martin Weiss, this morning, commented on how Pakistan is a greater menace in the Middle East, because it is already a nuclear power with at least 200 bombs, and is the headquarters of al Qaida and the Taliban. True enough, but who paid the bills for al Qaida? Who provided most of their members? Who finances the Taliban and the Islamic State? Largely the oil sheiks of our “ally”, Saudi Arabia , of course, whose Wahhabi sect of Islam is copied and even exceeded by those extremist groups. Wahhabis are spreading their doctrines into Islamic countries such as Libya, Algeria, Morocco, and the Saharan states to the west, and Pakistan and Afghanistan, to the east. Their madrassas, going for the young and disaffected, are making headway in the Islamic former Soviet States, Malaysia and Indonesia, and among the Islamic populations of India, China and Nigeria, among others. In this country, Minneapolis seems to have become a target, for some reason. Maybe elsewhere with Islamic populations. New York? Chattanooga? Mississippi? A few Islamic nations, such as Jordan, Iran, parts of Iraq, and perhaps Egypt seem to resist their Jihad – so far.
So what is your investment thesis based on these “revelations”, Chuck?
Contraction of money supply and economic growth has been a trend here for fifteen years or more. GNP only appears to be growing due to increased government spending. Overseas economic contractions is causing a lot of hot money to wash up on our shores to our benefit, but we can’t really be considered healthy because our economy is dependent on hot money and government deficit spending. Empire reading is just another bit of data highlighting this well established trend.
Mike, how about charting the number of religious orientated comments received and correlating this to market performance. Seems like a lot of subscribers are getting on bended knees of late.
I have looked at this. Perhaps surprisingly, there is a better correlation between religious comments and sales of novel athletic pants. Go figure.
I don’t think the market has climbed the old “wall of worry” so much as it has rode a wave of cheap worthless debt money, in spite of continuous negative real economic data. When the worthless paper balloons burst, look out below, the “wall of worry” will get buried.
“How can the U.S. remain an island of Prosperity in a sea of market sickness”, you ask, Mike. I suggest you talk to Larry Edelson, who has explained how often and in detail. If you disagree with him, time to duke it out in public, rather than giving us plebes conflicting advice.
Re Oil: GS is forecasting $ 930 billion in cancelled oil projects worldwide this year. Even CNOCC cut its budget by 35 per cent for the first time in a decade. The IEA estimates that nearly all shale producers are underwater with oil below $50. Deepwater drill rigs cost $500,000 a day. That’s 10,000 barrels a day to break even. In short. shale and offshore are being crushed by $50 oil. The US rig count is down 60 per cent. Production leveled and March and stocks have declined every month since then. Demand has done nothing but rise. 23 million cars sold in China last year. This is exactly what happened in 2007 and 2008. What followed was $140 oil, one if the worst recessions in US history, and 6,000 points off the Dow. Short oil and go long the Dow at your own peril. Jim
The fundamentals of the oil industry have changed with the technologies involved with drilling shale wells. Don’t compare 2008 to today. This type of revolution has not happened in the oil industry for a very long time. Simply look at us oil production since 1850 to day, no comparison.
A few months ago, Safe Money told of a sunami of foreign money fleeing to the U.S., running up the value of the dollar needed to invest in U.S. stocks. That explains a major factor causing of our present high dollar and stock averages. If some other factors cause the market to decline, what will these flight money people do? They may feel that they have nowhere else to go and are safer with the U.S. economy, even if the prices of their stocks decline. Alternatively, they could flee to gold
I’m not down to 35% like one reader reported. I am down 100% and waiting for the bottom.
Then, when I believe we are truly at the bottom, I will be buying the strong companies.
Of course the US will be effected by all the problems around the world–we are a part of a world economy.
The pathetic part–
the FEDERAL RESERVE’s futile continuation of its ridiculous and failing near zero interest rate policy long for the last four years leaves it essentially helpless to take remedial actions. Congratulations Mr. Bernanke and Ms. Yellen.
Optimism has been extreme with endless borrowing $200 T in world debt and I believe it is much higher. That’s roughly 3 times world GDP.
The entire world was scared of inflation. never a thought of deflation until 2015.
Why not borrow when money is free and inflation is a must.
Add to that $260 T in derivatives just to complicate matters.
Exactly the right combination for drastic over investment, debt, at all time highs.
Would anyone out there like to buy some percentage of the $260 T in derivatives now?
The least expected of all outcomes, deflation.
All commodities dropping like lead balloons for several years now. Hard to believe this is a result of the Plunge Protection Team.
Isn’t it amazing that the time to pay off debt has ever come?
The problem is that far too many in the public arena are listening to the Right Wing Conservative Propaganda and because these lies are repeated over and over again (as the Nazis did) they are believing it to be gospel when, in fact, it has been 180 degrees wrong…..
Example: the Crash occurred on the Republican watch with a Republican Majority Congress and the Stock Market was saved under a Democratic Administration and Democratic Majority Congress, yet to hear the talking heads (rather the “Screamers”) of the Conservative Right Wing Propaganda Press, one might be led to believe just the opposite…
Example #2: In the last 100 years almost ALL of the growth of the Middle Class has occurred during periods of Democratic Domination, yet to read the Right Wing Propaganda Press, one would be led to believe that just the opposite has occurred….
Mike, all you say makes a lot of sense and adding to that is the fact that institutions are only holding 2.7% cash according to IBD. The VIX is saying all is good, another bad sign. Holding US quality dividend payers might not be a bad idea if you’re not sure but I certainly don’t intend to move my savings account when I think things will be cheaper down the road. Rich
I think SHTF very soon. All of this Phony Fiat Printing is about to rear it’s ugly head.
FED has painted itself into a corner.
I believe there is a Global Depression underway as we speak.
I have rolled most of my Investments into Money Market until the Global Markets shake off their excesses.
I am going to guess that the Bear Markets will shed another 25% – 30%
Fed will increase the rate on October 28th 2015. I have said this since January 2015. Only a quarter of a point. But the whole point is knowing when.
1929 isn’t a long time ago. You need to read a brief history of time by Stephen Hawking, it looks like we are heading towards another Great Depression scenario and we all know where that led too.
It s generally a second-string economic report, but the numbers from the Empire State Manufacturing index are so bad that they have Mike concerned. Find out why.
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