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posted on 18 June 2015

June 2015 Philly Fed Manufacturing Strong Improvement

Written by Steven Hansen

The Philly Fed Business Outlook Survey growth improved strongly. Consider that this is the sixteenth month in a row of expansion. Key elements are positive.

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 more positive then the others recently.

The the index improved strongly from 6.7 to 15.2. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected 7.5 to 10.5 (consensus 8.0).

Manufacturing conditions in the region improved in June, according to firms responding to this month's Manufacturing Business Outlook Survey. Indicators for general activity, new orders, and shipments remained positive and increased over their readings in May. Employment and average work hours increased, on balance, at the reporting firms. Firms reported higher prices for raw materials and other inputs in June compared with reported price decreases in recent months. The survey's indicators of future activity suggest that firms expect continuing growth in the manufacturing sector over the next six months.

Indicators Suggest Growth

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 6.7 in May to 15.2 this month. This is the highest reading for the index since December (see Chart 1). The demand for manufactured goods, as measured by the survey's current new orders index, picked up this month. The new orders index increased 11 points to its highest reading since November. The current shipments index increased 13 points, also the highest reading since November.

Firms' responses suggest modest expansion in employment in June. The percentage of firms reporting an increase in employees in June (22 percent) exceeded the percentage reporting a decrease (18 percent). The current employment index, however, fell nearly 3 points, to 3.8. Firms reported an overall modest increase in the workweek compared with a decrease last month: The workweek index increased from -5.6 to 4.7.

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders has gone from contraction to expansion, and new orders are now strongly expanding.

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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