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posted on 21 May 2015

May 2015 Philly Fed Manufacturing Survey Softens With Key Elements Mixed

Written by Steven Hansen

The Philly Fed Business Outlook Survey growth declined modestly. Consider that this is the fifteenth month in a row of expansion. Key elements were mixed.

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 recently.

The the index declined marginally from 7.5 to 6.7. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected 3.5 to 14.5 (consensus 8.0).

Manufacturing activity in the region increased modestly in May, according to firms responding to this month's Manufacturing Business Outlook Survey. Indicators for general activity, new orders, and shipments were positive but remain at low readings. Employment increased at the reporting firms, but the employment index moderated compared with April. Firms reported continued price reductions in May, with indicators for prices of inputs and the firms' own products remaining negative. The survey's indicators of future activity suggest that firms expect continuing 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, decreased from 7.5 in April to 6.7 in May. The index has remained in a single-digit range for the first five months of this year (see Chart 1). The demand for manufactured goods, as measured by the survey's current new orders index, edged 3 points higher this month, with less than one-third of the firms reporting higher new orders in May compared with April. The current shipments index also increased 3 points to a reading of 1.

Firms' responses suggest some weakening in labor market conditions this month compared with April. The percentage of firms reporting an increase in employees in May (19 percent) exceeded the percentage reporting a decrease (13 percent). The current employment index, however, fell 5 points, to 6.7. Firms reported an overall modest decrease in the workweek: The percentage of firms reporting a shorter workweek (25 percent) was greater than the percentage reporting a longer workweek (19 percent).

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 returned to expansion this month.

This index has many false recession warnings.

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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