New York manufacturing expanded at its weakest pace in two months while input costs stayed stubbornly elevated, leaving policymakers little room to maneuver as they gather for a pivotal rate decision.
Manufacturing conditions in the New York region continued to expand in June, although the rate of expansion slowed notably, the results of the Empire State Manufacturing survey published Monday showed. Separately, a Federal Reserve report showed a slowdown in May industrial output, painting a picture of an economy that is losing momentum even as it avoids outright contraction.
Slowdown All Around
The general business conditions index for June fell 13.9 points to 5.7 from 19.6 reported for the previous month. This marked the lowest level for the index since March, when the headline index was at -0.2. Economists had expected a far shallower pullback to 13.20. While the index remaining above zero technically signals expansion, the magnitude of the miss and the breadth of weakness across sub-indices suggest the manufacturing sector is feeling the strain of elevated borrowing costs, lingering supply chain caution, and demand uncertainty tied to the Iran conflict.
Source: New York Fed
Most sub-indices showed notable growth deceleration during the month.
- The new orders index plunged to 3.5 from 22.7 — a sharp deterioration that signals front-loading demand from prior months may have run its course, with buyers now pulling back.
- The shipment index fell to 8.6 from 18.9.
- Delivery time index slipped to 11.9 from 20.4, pointing to lengthening lead times.
- Inventories index moved down to 0 from 9.7, suggesting manufacturers are running lean rather than building stock — a sign of caution about near-term demand visibility.
- Supply availability slipped to -13.9 from -10.7, indicating tightening conditions that could constrain output if demand rebounds.
- On the other hand, unfilled orders edged up 0.1 points to 5.
How Inflation Components Fared
Inflation measures of the report, namely the prices paid and prices received, remained elevated — a combination that continues to squeeze manufacturer margins and complicates the Fed's path toward easing. The persistence of input cost pressures even amid slowing demand reflects the structural nature of inflation in the current cycle, driven partly by energy costs linked to the Hormuz disruption.
- Prices paid slid 1.6 to 61, still historically high, indicating cost pressures remain a burden.
- Prices received edged down 0.4 points to 31.4, the widening gap between what manufacturers pay and what they can charge suggests margin compression is quietly building.
The employment indices came in mixed, with the number of employees index rising 1.3 points to 9.6, while the average workweek index slipped 6.4 points to 5.1. This is a signal that firms are retaining headcount but trimming hours, a classic early-cycle caution signal before outright layoffs.
Future Expectations Lose Steam
The survey showed that the future business conditions index fell 3.4 points to 30.1 despite most sub-indices showing improvement from month-ago levels. The resilience in the forward-looking components suggests manufacturers are not abandoning optimism entirely — the peace deal and a potential easing of energy costs could revive confidence quickly if conditions stabilize.
However, the future selling price index rose to its highest level since 2022, a warning signal for the Fed that inflation expectations at the producer level are re-anchoring higher, not lower. Capital expenditure plans softened, with the corresponding index moving down 4.6 points to 10.9, suggesting businesses are deferring investment decisions until there is greater clarity on rates, energy costs, and the durability of the peace agreement.
May Industrial Output Skids as Manufacturing Stalls
U.S. monthly industrial production growth slowed to 0.1% in May from 0.9% in the previous month. The consensus called for a 0.3% increase in May industrial output. On a year-over-year basis, output climbed 1.7%, a figure that flatters the headline but masks the sharp sequential deceleration now underway.
Industrial Production Slows
Source: St. Louis Fed
Manufacturing, which accounts for roughly 75% of total industrial output, stalled in May following an upwardly revised 0.7% increase in April. The performance of the manufacturing sector was the worst since December when output fell 0.2%. Utilities output fell 0.4%, reversing some of the 2.2% gain in the previous month, while mining output climbed 1.2%, faster than April's 0.2% growth, likely reflecting continued activity tied to elevated energy prices during the period.
Capacity utilization was unchanged at 75.7% in May, running below the long-run average and leaving meaningful slack in the system. For the Fed, this is a double-edged data point: subdued utilization argues against inflationary overheating from the supply side, but it also reflects an industrial base that is not firing on all cylinders.
What Monday’s Data Mean For Rates
Taken together, the Empire State survey and the industrial production report reinforce a stagflationary undertone: slowing growth alongside sticky prices, a combination that keeps the Fed in a difficult position heading into this week's Federal Open Market Committee (FOMC) meeting. The peace deal may ease energy-driven cost pressures over time, but Monday's data confirms the economy was already losing steam before that catalyst emerged.