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New York-FRB Empire State Manufacturing Survey
(Indicator of New York Manufacturing Activity)
New Orders
Web: www.newyorkfed.org/survey/empire/empiresurvey_overview.html
Slight month-to-month revisions.
Unfilled Orders
Shipments = Production – D Inventory
ESMS determines present and future condition of NY’s manufacturing industries. ESMS is correlated with the Philadelphia-FRB, Chicago-FRB and
ISM surveys. ESMS gives early indications of manufacturing strength or weakness and incipient signs of inflation.
NY-FRB polls 175 manufacturing CEOs on 1st business day of every month. Survey asks how manufacturing conditions have changed in the month
and what changes they expect to see in 6 months. Three possible answers: increasing activity, decreasing activity, no change in activity.
The NY-FRB uses a diffusion index = percentage of positive scores minus percentage of negative scores. A diffusion index of zero is the
breakeven point. Index greater than zero is expansion, less than zero is contraction. The larger the index, the greater the consensus. To
detect an underlying trend, calculate 3-month and 6-month moving averages.
Key Survey Questions:
General business conditions – measure of current and future factory activity.
New orders – harbinger of business confidence. Increase in new orders => increase future production, employment and capital spending.
Unfilled orders – If increase in demand is greater than production => overburdened manufacturers =>  unfilled orders =>  in delay in deliveries to
wholesalers =>  capital expenditures =>  production capacity.
Prices paid – Seeds of inflation begin here at this first stage of the production process. Increase in prices paid =>  prices charged to wholesales =>
 prices charged to retailers =>  prices charged to consumers.
Prices received – measures manufacturers’ ability to set prices (pricing power). Increase in prices received => increase corporate earnings and
profit margins. Global competition and a weak economy can reduce pricing power.
Number of employees – early indicator of manufacturing job market and labor market conditions.
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Market Analysis:
Bonds: If ESMS Index/Prices paid/Prices received increases =>  DP/P =>  DBonds =>  iBonds
Stocks:  ESMS Index =>  profits =>  PStocks
Dollar:  ESMS Index =>  manufacturing sector =>  DY/Y =>  DP/P =>  DBonds =>  iBonds =>  dollar
Current and Future General Activity Index
(Empire State Manufacturing Survey)
Seasoanally Adjusted
Diffusion Index*
100
100
80
80
60
60
40
40
20
20
0
0
01
-20
-40
03
Recession
6-Month Forecast
Current Activity
05
07
09
11
13
-20
-40
-60
-60
-80
-80
Diffusion Index*
Number of Future Employees & Future Capital Expenditures
(Empire State Manufacturing Survey)
50
50
40
40
30
30
20
20
10
10
0
0
01
-10
-20
03
05
Recession
Future Capital Expenditures
Future Employees
07
09
11
13
-10
-20
-30
-30
-40
-40
New and Unfilled Orders
Diffusion Index*
(Empire State Manufacturing Survey)
50
50
40
40
30
30
20
20
10
10
0
0
01
03
05
07
09
11
13
-10
-10
-20
-20
-30
-30
-40
-40
Recession
-50
New Orders
Unfilled Orders
-50
Shipments and Inventories
Diffusion Index*
(Empire State Manufacturing Survey)
50
50
40
40
30
30
20
20
10
10
0
0
01
03
05
07
09
11
13
-10
-10
-20
-20
-30
-30
-40
-40
Recession
-50
Shipments
Inventories
-50
Prices Paid and Prices Received
Diffusion Index*
(Empire State Manufacturing Survey)
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
01
03
05
07
09
11
13
-10
-10
-20
-20
-30
-30
-40
-50
Recession
Prices Paid
Prices Received
-40
-50
Broken Investment Banking Model
Deregulation
(FMA 1999)
+
Leverage
(40 : 1)
+
Mortgage
Securitization
+
(Separation of
loan origination
from loan holder)
Balance Sheet
Assets
Goldman Sachs
Morgan Stanley
Merrill Lynch
Lehman Brothers
Bear Stearns
Asset Portfolio
MBS/ABS/CDO/CLOs
•Illiquid
•Long term
Liabilities + Capital
Wholesale Funding Base
Commercial Paper
Repurchase Agreements
•Unstable
•Non-insured
•Short term
Capital
Falling
Home Prices
Credit Crunch Factors
• Subprime/jumbo mortgage default concerns
• Balance sheet asymmetric information
• Weakening economy
Dysfunctional Credit Markets
•Subprime mortgage
•Jumbo mortgage
•Interbank
Interest
Rate
S08Funds
S06Funds
i08
Fund flows
dried up
i06
D06Funds
Funds
08
Funds
06
Flow of
Funds
Term Asset-backed Security Loan Facility
(TALF)
(Restore credit flows to HHs and Firms
through the Securitization Market)
Recession => defaults =>  demand for ABS => mkt dislocation
 credit availability &  interest rates => economic slowdown
Revive the Shadow Banking System
2005-06: $1 trill/year in funding
Special Purpose Vehicle
Loan Pool
ABS
(Secured by
Loan pool)
Lenders
Sell Loans
ABS
Loans bundled
into securities
Borrowers
Auto
ABS
Auto
C.C.
Student
Business
$100 mil
TALF
Loans
$200B to
$1000 B
Reserves
Fed Borrowings
$92 million
Risk Capital
$8 million
TALF Loans
Originate Loans
Receive $$
F. I.s
Hedge Funds
Investment Funds
FRB-NY
Loan
Washington Maxim:
Temporary solution => Permanent fixture
•Non-recourse (Fed can only seize ABS)
•Secured by eligible collateral (AAA)
•3-yr term
•Interest rate = 1-mo LIBOR + 100 bps
•Loan-to-values and Haircuts (4-12%)
•Interest payable monthly
•Borrower has option to prepay loan
•ABS capital remittance must be used
to pay down TALF loan
Repurchase Agreements
(Repo)
(Sale and repurchase of securities agreement)
Repo = Cash Transaction + Forward Contract
(Loan origination)
(Loan repayment)
(Spot price)
(Forward price)
(Near leg)
(Far leg)
(Settlement date)
Buyer/Lender
Bank
Fed
T-Bill
Collateral:
T-Bills/Bonds
T-Bill
Fed
MMMFs
$
Reverse Repo:
Repo:
Buyer/Lender
Seller/Borrower
Repo:
•
Fed adds reserves
$
Reverse Repo:
• Fed initially drains reserves
• Adds reserves back later
• Used to target iff
•Repos began in 1917 by Fed to lend to banks
•$5 Trillion Repo market today
•Secured cash loan
•Legal transfer of security to lender
•Repurchase price > Original price (gap = interest)
•1-7 day term typically, up to 2 years
•Typically over collateralized to mitigate credit risk
•Fed describes transaction from the counterparty’s viewpoint,
rather than from their own.