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posted on 19 November 2015

November 2015 Philly Fed Manufacturing Squeaks Into Expansion.

Written by Steven Hansen

The Philly Fed Business Outlook Survey squeaked out of contraction. However, 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 index improved from -4.5 to +1.9. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) -2.1 to 3.2 (consensus 0.0).

Manufacturing conditions in the region showed slight improvement this month, according to firms responding to the November Manufacturing Business Outlook Survey. The indicator for general activity was slightly positive this month, following two months in negative territory. Indexes for new orders and shipments remained negative, although they increased from lower readings in October. Firms reported slight increases in overall employment this month but declines in average work hours. Manufactured goods prices were near steady. The survey's future indicators showed improvement. Only a small percentage of firms expect a downturn in business activity over the next six months.

Current Indicators Improved but Weakness Persists

The diffusion index for current activity edged higher this month, from -4.5 to 1.9, its first positive reading in three months (see Chart). The indexes for current new orders and shipments approached zero this month, increasing 7 points and 4 points, respectively. Both indexes remained negative, however, suggesting continued weakness.

The survey's indicators for labor market conditions were mixed this month. The percentage of firms reporting increases in employment (14 percent) was slightly greater than the percentage reporting decreases (11 percent). The employment index increased 4 points, from -1.7 to 2.6. Firms, however, reported overall declines in average work hours in November. The workweek index registered its second consecutive negative reading and declined 9 points.

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders improved and surprisingly is now in expansion even though new orders remained in contraction.

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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