April 2012 Philly Fed Survey Less Good

Written by Steven Hansen

The Philly Fed Business Outlook Survey headlines for April 2012 show the index was less good – but remained clearly 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 10.0 to 10.3 (actual was 8.5)

Manufacturing firms responding to the April Business Outlook Survey indicated that regional manufacturing activity expanded modestly this month. The survey’s broad indicators for general activity, new orders, and shipments all remained positive but fell slightly from their readings last month. The indicator for current employment, however, showed a notable improvement. Price pressures were only slightly more widespread this month. The survey’s broad indicators of future activity remained at relatively high readings, and firms were more optimistic about their plans for hiring over the next six months.

Indicators Suggest Continued Expansion

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from a reading of 12.5 in March to 8.5. Indexes for new orders and shipments remained positive but were slightly weaker than their March readings. The indexes for new orders and shipments, which decreased about 1 point, remain at relatively low readings. The indexes for current unfilled orders increased 14 points and returned to positive territory this month, suggesting a backlog of unfilled orders. Inventories were also reported on the rise this month, with the inventory index increasing 7 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 contracted for the second month in a row.

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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