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WASHINGTON (Reuters) – Factory activity in New York state fell for the third time this year in May as new orders and shipments fell sharply, even as manufacturers were slightly more optimistic about business conditions over the next six months.
But the New York Fed survey on Monday showed labor market conditions remained strong, with factories in the region hiring more workers and increasing their hours. Consistent with the idea that inflation may have peaked, there has been some easing in the prices factories pay for inputs and the prices they receive for products.
The New York Fed’s “Imperial State” index of current business conditions fell 36.2 points this month to -11.6. A reading below zero indicates a contraction in New York manufacturing.
The survey was conducted from May 2 to May 9. Economists see the drop in economic activity as an early sign of the impact of the Fed’s aggressive monetary policy stance on manufacturing, which has led to tightening financial market conditions.
“Recent data has been very volatile, so it’s hard to spot a clear underlying trend,” said Daniel Silver, an economist at JPMorgan (NYSE: ) in New York. “But the decline in the May report and weaker levels in some key indicators may suggest a stronger dollar is weighing on manufacturing.”
The Fed raised its policy rate by half a percentage point this month, the largest rate hike in 22 years, and said it would begin reducing its bond holdings next month.
The dollar has gained at least 2.7% against the currencies of America’s major trading partners since the Federal Reserve started raising interest rates in March.
Order, shipment crash
Manufacturers reported a sharp drop in orders. The survey’s new orders index plunged 33.9 points to -8.8. Shipments and backlog measures also fell sharply. Factories continue to wait long for supplies to be delivered.
While prices remain high, they are off recent highs. The survey’s measure of prices paid by manufacturers fell 12.7 points to 73.7, and its measure of prices received fell 3.5 points to 45.6.
There is cautious optimism that the worst price hikes across the economy are behind us, with data last week showing annual consumer prices slowing in April.
“It’s kind of comforting because it shows that while inflation is still very much a problem in the Empire State, price pressures may have started to peak,” said Adam Adams, an economist at Moody’s (NYSE: ) Analytics in West Chester, Pa. Cummings said.
The survey’s measure of factory employment rose 7 points to 14.0, while the measure of the average workweek rose 1.9 points to 11.9, a five-month high.
Manufacturers are mildly optimistic about the outlook for the next six months. The future business conditions index rose 2.8 points to 18.0, still less than half the index’s historical average.
The capital expenditure index fell 6.4 points to 25.4, while a measure of technology spending also fell. Economists expect these forward-looking measures to remain soft amid rising recession risks and rising borrowing costs.
“In the current investigation, the Fed’s fingerprints can be seen in several places,” Cummings said. “Both planned capital spending and technology spending indices continue to move in the wrong direction, likely at least in part due to rising borrowing costs.”