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posted on 17 December 2015

December 2015 Philly Fed Manufacturing Fell Back Into Contraction.

Written by Steven Hansen

The Philly Fed Business Outlook Survey fell back into contraction. However, key elements are also in contraction. Both manufacturing surveys released for this month are 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 more positive then the others recently.

The index declined from +1.9 to -5.9. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) -5.0 to 8.0 (consensus 1.2).

Manufacturing conditions in the region weakened this month, according to firms responding to the December Manufacturing Business Outlook Survey. The indicator for general activity, which was slightly positive last month, fell into negative territory. The indexes for new orders and shipments were mixed. Firms reported slight increases in overall employment this month and an increase in average work hours compared with November. Manufactured goods prices, as well as input prices, declined this month. Nearly all of the survey's future indicators showed notable weakening this month.

Most Current Indicators Fall

The diffusion index for current activity returned to negative territory this month, decreasing from 1.9 to -5.9. This is the third negative reading in the past four months (see Chart 1). The index for current new orders remained negative and fell 6 points, to -9.5. However, firms reported higher shipments, as the current shipments index increased 6 points to a reading of 3.7. Firms reported a decline in unfilled orders, with the index falling from 2.4 to -17.7. The current inventories index increased 9 points to its first positive reading in four months.

The survey's indicators for labor market conditions were slightly improved this month. The percentage of firms reporting increases in employment (16 percent) was slightly greater than the percentage reporting decreases (11 percent). The employment index increased 2 points, from 2.6 to 4.1. Firms also reported an increase in average work hours in December. The workweek index registered its first positive reading in three months, increasing 22 points to 5.5.

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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