Awful 'Empire State' Manufacturing Data from the New York Fed Leaves Markets Unmoved

Monday's release of the Empire State manufacturing index, a widely followed statistic that tracks business activity of manufacturers in New York state, saw that metric fall in September to minus 10.4 from minus 5.9 the month prior. Economists had expected a month-ver-month improvement to 0.0, which would indicate neither expansion nor contraction in the sector.

September's number marked the lowest reading since November 2010.

Key sub-indexes revealed an even direr picture, with manufacturers revealing a precipitous drop in new and unfilled orders, commenting that input prices for goods were edging higher and hiring was slowing from previous months. Employment and new orders indicators were the hardest hit.

"In the context of deterioration in other regional surveys, the weakness here is further confirmation of contraction in economic activity in the U.S. factory sector," economists at Wells Fargo wrote in a note to clients following the report, further noting that "the weakness in today's survey presents downside risk to business spending and the economy."

"The momentum has turned negative in manufacturing," Guy Berger, a U.S. economist at RBS Securities, told Bloomberg.

Not all economists were as pessimistic on the numbers. Paul Dales, senior U.S. economist at Capital Economics, wrote in an email that "the fall in the US Empire State manufacturing index in September [...] is probably overdoing some of the gloom." Noting a more robust weighted average of the index did not fall as sharply, Dales explained that "industrial output is hardly growing at all, but it is not plunging."

Similarly, Cooper Howes, an economist at Barclays Capital, did not fully give credit to the huge slump in the employment component of the index, noting in an email that "some of the softness in the employment index is likely due to difficulties in finding qualified candidates for skilled positions within manufacturing."

The most curious response to the numbers, however, was given by the markets themselves. The benchmark S&P 500 Index of U.S. equities actually rose slightly during the first minutes of trading following the report, and then bobbed up and down around the unchanged line, recently noting a drop of 0.17 percent from the prior week's close.

Some market watchers said markets' virtual non-response has a lot to do with the Fed announcement last week that it would engage in unlimited open-ended bond buying and is planning to continue into that path "even as the economy picks up."

For months, the market has essentially believed bad news would lead to further action from the Fed or, as noted by Barclays, "in this context, bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response."

Barclays believes this dynamic is likely over. Given Monday's market response to the poor economic data, whether that is true or not is yet to be seen.