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May 2012 Philly Fed Survey Significantly Deteriorated

Written by Steven Hansen

The Philly Fed Business Outlook Survey turned nasty in May 2012 showing business conditions no longer expanding. Survey components new orders and unfilled orders again contracted – now in contraction territory.

This is a very noisy index which readers should be reminded is sentiment based.  However, trend lines are always important – and this index is without question deteriorating.

The market was expecting the index values between 8.8 to 10.0 (actual was -5.8 which indicates business is contracting)

Firms responding to the May Business Outlook Survey indicated that manufacturing growth fell back from the pace of recent months. The survey’s broad indicators for general activity fell into negative territory for the first time in eight months. Indicators for new orders and employment also suggested slight declines from April. Input price pressures were less in evidence this month, and for the first time in nine months, more firms reported price declines for their products than reported increases. The survey’s indicators of future activity remained positive but weakened considerably from April.

Indicators Suggest Slowing

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 8.5 in April to -5.8 in May. The index for new orders fell four points, from 2.7 to -1.2, its first negative reading in eight months. The shipments index edged 1 point higher and remained just above zero. The indexes for current unfilled orders and delivery times both declined and registered negative readings, suggesting lower levels of unfilled orders and faster deliveries.

Firms’ responses suggest a slight decline in employment this month. The current employment index, which had been positive for eight consecutive months, decreased 19 points, to -1.3. The percentage of firms reporting decreases in employment (16 percent) was slightly higher than the percentage reporting increases (14 percent). Firms also reported a slight decrease in average hours worked compared with April.

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 third 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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