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posted on 20 October 2016

October 2016 Philly Fed Manufacturing Survey Declines But Remains In Expansion.

Written by Steven Hansen

The Philly Fed Business Outlook Survey declined but remains in 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 from new orders - and stands in stark contrast to the New York Fed's survey which fell further into contraction. But the trend in both surveys was improvement. This survey was above expectations.

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 +12.8 to +9.7. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) 2.0 to 15.7 (consensus +7.0).

Results from the October Manufacturing Business Outlook Survey suggest that regional manufacturing conditions continued to improve. Indexes for general activity, new orders, and shipments were all positive this month. But firms reported continued weakness in overall labor market conditions. Firms expect continued growth for manufacturing over the next six months and are becoming more optimistic about employment expansion.

New Orders Pick Up, but Employment Still Not Growing

The index for current manufacturing activity in the region edged down, from a reading of 12.8 in September to 9.7 this month. The index has now been positive for three consecutive months (see Chart 1). Other broad indicators showed notable improvement. The new orders index improved markedly this month, increasing from 1.4 in September to 16.3 in October. The percentage of firms reporting increases in new orders this month rose to 40 percent from 30 percent last month. The current shipments index also improved, rising 24 points to 15.3. The delivery times, unfilled orders, and inventories indexes remained weak, however, with all registering negative readings, although they were less negative than in September.

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 is in 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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