The general business conditions index in the New York Fed's Empire State survey of manufacturing is down 21.7 points to minus 32.9 in January after minus 11.2 in December and reaches its lowest reading since minus 48.5 in May 2020. The index is well below the consensus of minus 8.1 in an Econoday survey. The index for future business conditions is up to 8.0 in January after 6.3 in December. This won't eliminate concerns that the factory sector may be entering a recession, but it could signal that it isn't expected to last long.

The sharp contraction is likely a reaction to the drop of 27.5 points in the new orders index to minus 31.1 in January after minus 3.6 in December. The shipments index is down to minus 22.4 in January after 5.3 in December. The employment index remains positive at 2.8 after 14.0. If hiring is slowing, it continues as manufacturers are hiring qualified workers where they can be found. Supply chain issues seem to be resolved with the delivery times index nearing neutral at 0.9 in January after 1.9 in December. The inventories index is up to 4.5 in January after a dip to 3.7 in December. Manufacturers are going to closely watch inventories to ensure these do not accumulate should a recession materialize.

The prices paid index takes a big step lower to 33.0 in January after 50.5 in December and is the lowest since 23.1 in December 2021. At least for commodities, price inflation is easing although energy costs remain volatile. The prices received index is down to 18.8 in January after 25.2 in December. This is the lowest since 9.1 in December 2021. Manufacturers may have less need to pass through increased costs, but are still raising prices.

After December's disappointing minus 11.2, the Empire State index in January is expected to remain in the negative column at minus 8.1.

The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 200 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead.

Investors track economic data like the Empire State Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures. The Empire Manufacturing Survey gives a detailed look at New York state's manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is the first clue on the nation's manufacturing sector, reported in advance of the Philadelphia Fed's business outlook survey.