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posted on 16 July 2015

July 2015 Philly Fed Manufacturing Growth Rate Declines

Written by Steven Hansen

The Philly Fed Business Outlook Survey growth fell significantly - but remained in expansion. Key elements are 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 more positive then the others recently.

The the index declined significantly from 15.2 to 5.7. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) 9.0 to 18.9 (consensus 12.0).

Manufacturing activity in the region increased modestly in July, according to firms responding to this month's Manufacturing Business Outlook Survey. Indicators for general activity, new orders, and shipments remained positive, although they declined from their readings in June. Employment was essentially flat at the reporting firms this month. Firms reported higher prices for raw materials and other inputs in July, but prices of manufactured goods were reported as mostly steady. The survey's index of future activity improved slightly, however, indicating that firms expect continuing growth in the manufacturing sector over the next six months.

Indicators Suggest Modest Growth

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 15.2 in June to 5.7 this month. With the exception of June's reading, the diffusion index has remained in the single-digit range since the beginning of this year (see Chart 1). The demand for manufactured goods, as measured by the survey's current new orders index, also expanded modestly. The new orders index remained positive but fell 8 points. The current shipments index decreased 10 points from its six-month high reading in June. Both unfilled orders and delivery time indexes were negative this month, suggesting a decline in the backlog of orders and faster delivery times.

Firms' responses suggest steady employment in July. The percentage of firms reporting an increase in employees in July was equal to the percentage reporting a decrease (12 percent). The current employment index fell for the third consecutive month, from a reading of 3.8 in June to -0.4. Firms reported a modest overall increase in the workweek: The workweek index was positive but little changed at 4.0.

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders has gone from expansion to contraction, while new orders continued to expand - but at a slower rate.

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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