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WASHINGTON (Reuters) – Factory activity in New York state fell in May for the third time this year amid a slump in new orders and shipments, although manufacturers were mildly optimistic about trading conditions over the next six months.
But the New York Federal Reserve’s survey on Monday showed labor market conditions remained strong, with factories across the region hiring more workers and increasing employee hours. There has been some easing in measures of prices paid for inputs by factories and received for products, in line with views that inflation has likely peaked.
The New York Fed’s “Empire State” index of current trading conditions fell 36.2 points to -11.6 this month. A reading below zero signals a contraction in New York’s manufacturing sector.
The survey was conducted between May 2 and May 9. Economists viewed the decline in activity as an early signal of the impact on the manufacturing sector of the Federal Reserve’s aggressive monetary policy, which has tightened financial market conditions.
“The data has been very volatile lately, so it’s hard to spot any clear underlying trends,” said Daniel Silver, an economist at JPMorgan in New York. “But the decline reported in May and weak levels in some of the leading indicators could be a sign that the stronger dollar is weighing on the manufacturing sector.”
The U.S. central bank this month raised its benchmark rate by half a percentage point, the biggest hike in 22 years, and said it would start cutting its bond holdings next month.
The dollar has gained at least 2.7% against the currencies of major US trading partners since the Fed began raising rates in March.
ORDERS, SHIPMENTS COLLAPSE
Manufacturers reported a sharp drop in orders. The survey’s new orders index plunged 33.9 points to -8.8. There were also massive declines in shipments and unfilled orders. Factories continued to wait long periods for supplies to be delivered.
Although prices have remained high, they have moved away from recent highs. The survey’s measure of prices paid by manufacturers fell 12.7 points to 73.7, and its measure of prices received slipped 3.5 points to 45.6.
There is cautious optimism that the worst of the economy-wide price increases is behind it, with data from last week showing a deceleration in annual consumer prices in April.
“That’s somewhat comforting because it suggests that while inflation remains very problematic in the Empire State, price pressures may have started to peak,” said Adam Kamins, economist at Moody’s Analytics in West. Chester, Pennsylvania.
The survey’s factory employment measure rose seven points to 14.0, while the average workweek gauge climbed 1.9 points to 11.9, a five-month high .
Manufacturers were slightly 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 spending index fell 6.4 points to 25.4, while a measure of technology spending also fell. Economists expected these forward-looking measures to remain subdued amid rising recession risks and higher borrowing costs.
“Fed fingerprints can be seen in a few places in the current investigation,” Kamins said. “Planned capital spending and technology spending indices continue to move in the wrong direction, likely in part due to rising borrowing costs.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
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