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posted on 18 August 2016

August 2016 Philly Fed Manufacturing Survey Now Slightly In Expansion. However, Key Elements Significantly Declined.

Written by Steven Hansen

The Philly Fed Business Outlook Survey climbed into expansion. Key elements significantly DECLINED and returned to contraction. The only other manufacturing survey released so far for this month was 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 improved from -2.9 to +2.0. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) -5.0 to 5.5 (consensus +2.0).

Firms responding to the Manufacturing Business Outlook Survey suggest that growth was positive but tenuous this month. The diffusion index for current general activity moved from a negative reading to a marginally positive reading, while the indicators for new orders and employment suggested continued general weakness in business conditions. Of the current broad indicators, the diffusion index for shipments recorded the strongest reading. The respondents were confident about future growth, as their forecasts of future activity showed notable improvement.

Current Indicators Remain Weak

The index for current manufacturing activity in the region rose 5 points to only 2.0 in August, as the share of firms reporting an increase in activity (35 percent) barely exceeded the share reporting a decrease (33 percent). This is only the third positive reading of the index in the current year (see Chart).

z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Both new orders and unfilled orders improved and climbed into expansion.

z philly fed2.PNG

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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