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Farrell: No Capital 'E' for New York Manufacturing

I was born and raised in New York. Never got very far. New York has always been called the Empire State and it was always spelled with a capital "E", of course. But led by Machine Politico David Paterson (sorry, I can't be apolitical on this one: it has nothing to do with his political party; it has everything to do with the man), who followed the world-famous Elliot Spitzer, I try to duck the question of where I am from almost like I duck the question of what I do. Traveling throughout the country and telling people you're from New York and work on Wall Street halts a lot of conversations.

Trying to rival Rhode Island for corrupt politics is one thing, but falling down as a commercial and industrial center is another. The Empire State Index was released Monday morning and registered a dismal 7.1 on its own version of the Richter scale. That is down from 19 in June, although up a touch from 5.1 in July.

At first glance it looks as though manufacturing stabilized a bit, being almost unchanged from last month. Unfortunately, the "new orders index" subcomponent fell to a 14-month low of -2.7 from 10.1, and the "shipments index" to a 16-month low of 6.3 (from 11.5). The all-important "employment index" did rise to 14.3 from 7.9, but as Paul Ashworth of Toronto's Capital Economics says, "it is hard to see manufacturing firms adding extra workers for much longer if new orders are drying up." Net/net, this is a lousy report.

"Everyone wants to export more to push their economies forward, but who is to buy the exports?" -Soleil, Vince Farrell

It's only one report, but I have been saying that a lot lately. If anything, this will emphasize the possibility of a double dip in the economy. (Some, like Robert Reich, are saying we can't have a double dip because we never recovered from the first dip. And a Bloomberg survey showed 70% of Americans thought we were still in recession.) I'm not sure even throwing Paterson under the political bus would help. But it might feel good.

The National Association of Home Builders also released its monthly report, and it showed housing still stuck in the mud. The reading was 13.0, as expected, but essentially unchanged from the last two months. The NAHB index has declined each month since May when it became clear that the housing tax credit would go away. Probably the biggest risk to a double dip, or a renewal of the first dip (to satisfy Mr. Reich), lies with the fragile state of housing. Despite 4.5% 30-year mortgages, housing remains dragging along the bottom. The risk is it falls to a new bottom.

I pulled out some notes from just a few weeks ago and can't believe how the world has bounced back and forth in such a brief period of time. The European stress tests were announced on or about July 23rd, and only 7 out of 91 banks were deemed to be at risk under a worst-case scenario. But just last week Ireland had to put more capital into two banks when conditions were hardly what would be defined as worst case. My notes, which were cribbed from several papers (so what follows is an amalgam of news comments from several sources), highlighted a much better Europe. August, it was thought, should be a "breeze". Greece was thought to be performing well; southern European bonds had recovered; the stress tests didn't roil the market; and the ECB had wound down its sovereign bond purchases. The Euro zone was performing much better than had been expected, and the spread between Germany's and other countries' bonds was tighter. Now the reverse of all the above is true. Spreads have widened, and the ECB had to buy Irish debt last week. The southern perimeter countries are issuing more debt than had been thought necessary, and it's clear, at least to me, the stress tests were nowhere near stressful enough.

The dollar has rallied quite a bit versus the euro in the last few days and was trading between $1.27-$1.28 against $1.333 a short while ago. What looked to be a resurgence in Europe is faltering. But not to feel lonely, Japan's GDP report for the second quarter fell well short of expectations, registering a gain of only 0.4% at an annual pace against an expected 2.3% growth. Everyone wants to export more to push their economies forward, but who is to buy the exports (or, again, is it "whom"? - I will never get that right).

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