March 2012 Philly Fed Survey Better, Don’t Look at the Details

Written by Steven Hansen

The Philly Fed Business Outlook Survey headlines for March 2012 show the index overall again improved slightly – and it remains in expansion territory. Survey components new orders and unfilled orders contracted dramatically – with unfilled orders now in contraction territory.

I am reminded of sentiment that I overheard that you should not look too closely at the detail in surveys as they are often contradictory.  This is a very noisy index which overall is trending up.

The market was expecting the index values between 12.5 to 15.0 (actual was 12.5)

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged slightly higher, from a reading of 10.2 in February to 12.5, its highest reading since April of last year (see Chart). Indexes for new orders and shipments remained positive but weaker than their February levels. The new orders index decreased 8 points, to 3.3, while the shipments index declined 12 points, to 3.5. The indexes for both delivery times and unfilled orders, which recorded slightly positive readings last month, fell back into negative territory this month, suggesting faster deliveries and a decline in unfilled orders.

Indicators Suggest Continued Expansion

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged slightly higher, from a reading of 10.2 in February to 12.5, its highest reading since April of last year (see Chart). Indexes for new orders and shipments remained positive but weaker than their February levels. The new orders index decreased 8 points, to 3.3, while the shipments index declined 12 points, to 3.5. The indexes for both delivery times and unfilled orders, which recorded slightly positive readings last month, fell back into negative territory this month, suggesting faster deliveries and a decline in unfilled orders.

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 contracted dramatically this month.

Although this index has many false recession warnings, it is currently above levels associated with past recessions.

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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