Empire State manufacturing index drops in May, but components remain strong.

The Empire State manufacturing index fell to 11.90 in May from 21.70 in April, well below our (21.0) and consensus (19.55) expectations. The component indices, which do not contribute directly to the headline index of general business conditions, were much more encouraging. The new orders index slipped to 17.19 from 22.34, but remained strong; the shipments index edged lower to 25.75 from 28.29; and the supplier delivery time index rose to 2.15 from -1.28. The employment index rose to its second-highest reading in the history of the survey (which began in July 2001), reaching 24.73 in May from 23.08 in April. The unfilled orders index jumped to 9.68 from 2.56, the inventories index rebounded to 10.75 from -1.28, and the average employee workweek index surged to 23.66 from 10.26. On the inflation front, the prices paid index vaulted to 69.89 from 57.69, while the prices received index increased to 27.96 from 26.92.

While the headline index (which measures reported general business conditions) was weak in May, the fraction of respondents reporting that business conditions had worsened actually fell to its lowest level since 2006, and the fraction reporting no change jumped to an unprecedented 66.48%. So on balance, fewer New York-area manufacturers reported overall improvement in May than in April, but the details underlying this decline, coupled with the relatively strong performance in the component indices, point to more of a pause in the pace of expansion than a slowdown.