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posted on 16 April 2015

March 2015 Philly Fed Manufacturing Survey Strengthens But Key Internals in Contraction

Written by Steven Hansen

The Philly Fed Business Outlook Survey growth improved modestly. Consider that this is the fourteenth month in a row of expansion. Key elements were in CONTRACTION.

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 14 months.

The the index improved from 5.0 to 7.5. Positive numbers indicate market expansion, negative numbers indicate contraction.

Manufacturing activity in the region increased modestly in April, according to firms responding to this month's Manufacturing Business Outlook Survey. Indicators for general activity and new orders were positive but remained at low readings. Firms reported overall declines in shipments this month, but employment and work hours increased at the reporting firms. Firms reported continued price reductions in April, with indicators for prices of inputs and the firms' own products remaining negative. The survey's indicators of future activity suggest a continuation of modest growth in the manufacturing sector over the next six months.

Indicators Suggest Slight Growth

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 5.0 in March to 7.5 this month. The index has hovered in a single-digit range for the first four months of this year (see Chart 1). The demand for manufactured goods, as measured by the survey's current new orders index, was virtually flat this month. The index was only slightly positive and fell 3 points from its reading in March. The current shipments index rebounded 6 points but remained negative for the second consecutive month.

Firms' responses suggest some improvement in labor market conditions compared with March. The current employment index increased 8 points, to 11.5, its highest reading in five months. The percentage of firms reporting an increase in employees in April (21 percent) exceeded the percentage reporting a decrease (9 percent). Firms reported modest increases in the workweek: The percentage of firms reporting a longer workweek (14 percent) was greater than the percentage reporting a shorter workweek (10 percent) for the first time in four months.

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders remains in contraction territory, and new orders went into contraction this month.

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).

Summary of all Federal Reserve Districts Manufacturing:

Richmond Fed (hyperlink to reports):

z richmond_man.PNG

Kansas Fed (hyperlink to reports):

z kansas_man.PNG

Dallas Fed (hyperlink to reports):

z dallas_man.PNG

Philly Fed (hyperlink to reports):

z philly fed1.PNG

New York Fed (hyperlink to reports):

z empire1.PNG

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

Holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (lighter blue 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.

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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