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posted on 19 February 2015

February 2015 Philly Fed Manufacturing Survey Declines Marginally. This Index Has Declined For Three Months

Written by Steven Hansen

The Philly Fed Business Outlook Survey growth marginally declined again and continues to suggest weaker growth. Consider however that this is the twelth month in a row of expansion. Key elements remain in expansion. This survey came in under expectations.

This is a very noisy index which readers should be reminded is sentiment based. The Philly Fed historically is one of the more negative of all the Fed manufacturing surveys but has been positive over the last 12 months.

The market was expecting the index value of +6.0 to +15.0 (consensus 8.2) versus the actual at 5.2. Positive numbers indicate market expansion, negative numbers indicate contraction.

Firms responding to the Manufacturing Business Outlook Survey indicated continued modest growth in the region's manufacturing sector in February. Although the current activity index fell for the third consecutive month, it remained positive, and the employment indicator increased from its reading last month. The survey's future activity index also fell but continues to reflect general optimism about manufacturing growth in the region over the next six months.

Indicators Reflect Modest Growth

The diffusion index for current general activity fell slightly, from a reading of 6.3 in January to 5.2 this month (see Chart 1). Half of the responding firms indicated there was no change in activity from January to February. The current new orders index fell 3 points, but the shipments and unfilled orders indexes turned positive and rose 15 and 16 points, respectively. The index for delivery times increased 6 points but remained negative, while the index for inventories rose 16 points.

The survey's indicators for current labor market conditions suggest a slight improvement this month, as the employment index increased 6 points and returned to a positive reading (see Chart 2, next page). The percentage of firms reporting increases in employment (21 percent) exceeded the percentage reporting decreases (17 percent). The workweek index was negative with almost no change from last month.

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders has reversed again and is now in expansion territory, and new orders expansion continued at a slower rate.

This index has many false recession warnings. However, holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (long dark blue bar) and US Census manufacturing shipments (long pink bar) to the Philly Fed Survey (yellow bar).

Comparing Surveys to Hard Data

z survey1.png

In the above graphic, hard data is the long bars, and surveys are the short bars. The arrows on the left side are the key to growth or contraction.

Summary of all Federal Reserve Districts Manufacturing:

Richmond Fed:

z richmond_man.PNG

Kansas Fed:

z kansas_man.PNG

Dallas Fed:

z dallas_man.PNG

Philly Fed:

z philly fed1.PNG

New York Fed:

z empire1.PNG

Federal Reserve Industrial Production - Actual Data (hyperlink to report)

Caveats on the use of Philly Fed Business Outlook Survey:

This is a survey, a quantification of opinion - not facts and data. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions. Econintersect finds they do not necessarily end up being consistent compared to hard economic data that comes later, and can miss economic turning points.

This survey is very noisy - and recently showed recessionary conditions. And it is understood from 3Q2011 GDP that the economy was expanding even though this index was in contraction territory. On the positive side, it hit the start and finish of the 2007 recession exactly.

No survey is accurate in projecting employment - and the Philly Fed Business Outlook Survey is no exception. Although there are some general correlation in trends, month-to-month movements have not correlated with the BLS Service Sector Employment data.

Over time, there is a general correlation with real business data - but month-to-month conflicts are frequent.



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