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posted on 15 September 2016

September 2016 Philly Fed Manufacturing Survey Rises Further Into Expansion.

Written by Steven Hansen

The Philly Fed Business Outlook Survey climbed further into expansion. Key elements were mixed. The only other manufacturing survey released so far for this month was in contraction.

Analyst Opinion of the Philly Fed Business Outllook Survey

There was significant strength in this survey - and stands in stark contrast to the New York Fed's survey which remained in contraction. But the trend in both surveys was improvement. This survey was well above expectation.

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 +2.0 to +12.8. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) -3.0 to 4.9 (consensus +2.0).

Results from the Manufacturing Business Outlook Survey suggest that regional manufacturing conditions continued to improve in September. Indicators for general activity and new orders were positive and increased from their readings last month. Indicators for shipments and employment, however, were negative, suggesting weaker performance for the sector. Firms remain optimistic about growth over the next six months and were more positive about increasing employment.

Activity Picks Up, but Employment Still Weak

The index for current manufacturing activity in the region increased 11 points to 12.8. For the first time since August of last year, the index has registered two consecutive positive readings (see Chart 1). The new orders index also improved, increasing from -7.2 to 1.4. The percentage of firms reporting increases in new orders this month edged up to 30 percent from 27 percent last month. Other current indicators suggested weaker conditions, however. The current shipments index declined from 8.4 in August to -8.8 this month. Both the delivery times and unfilled orders indexes remained weak, with both indexes staying in negative territory. Firms also reported declines in inventories this month: The inventories index declined from -9.2 to -26.2. The indicators for unfilled orders, delivery times, and inventories have been negative for most of this year.

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, but only new orders 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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