December 2011 Philly Fed Business Survey Improves Slightly

The Philly Fed Business Outlook Survey headlines for December 2011 show the index improved slightly – and remains in growth territory.

Responses to the Business Outlook Survey this month suggest that regional manufacturing continued to improve in December. All of the broad indicators remained positive and suggest a modest expansion of activity. Increases in input prices were more widespread this month, and there was an uptick in the number of firms reporting increased prices for their own goods. The broadest indicator of future activity reflected a trend of increased optimism about growth over the next six months.

Indicators Suggest Continued Expansion

The diffusion index of current activity, the survey’s broadest measure of manufacturing conditions, remained positive for the third consecutive month and increased from 3.6 in November to 10.3 (see Chart). The percentage of firms reporting increases in activity (25 percent) exceeded the percentage reporting decreases (15 percent). The index for current new orders showed a similar improvement, increasing 8 points. The shipments index, at 6.7, was mostly flat. Twice as many firms reported declines in inventories (30 percent) as reported increases (15 percent) and the current inventory index fell 22 points to -14.9.

Labor market conditions continue to show overall improvement, but indexes edged down this month. Twenty percent of the firms reported an increase in employment; 10 percent reported a decrease. The current employment index remained positive at 10.7, only 1 point lower than in November. The average workweek index also remained positive but fell nearly 9 points.

Econintersect believes the important elements of this survey are new orders and unfilled orders. The number of respondents who thought new orders and unfilled orders were improving grew this month.

Although this index has many false recession warnings, it is currently above levels associated with past recessions.  Just making this statement indicates that the value of this index is not that great.

Caveats on the use of Philly Fed Business Outlook Survey:

Remember, surveys are supposed to be a peek at the future, but Econintersect continues to warn these are no more than interesting bar room talk. This is not data; rather it is opinion which leads hard data by a month or so, and often the hard data differs from the corresponding prior opinion.

This is a quantification of opinion. Opinion surveys are useful for general impressions but Econintersect finds they usually 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.

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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