September 2012 Philly Fed Survey Now Barely In Contraction Territory

Written by Steven Hansen

The Philly Fed Business Outlook Survey is again “less bad” in the Philly region – continuing to show manufacturing contraction. However, survey component new orders showed expansion – but just barely. Unfilled orders was also less bad.

This is a very noisy index which readers should be reminded is sentiment based. However, trend lines are always important – and this index now has a short term improving trend.

The market was expecting the index value of -4.0 to -5.0 (actual was -1.9) which indicates business is contracting).  Positive numbers indicate market expansion, negative numbers indicate contraction.

Firms responding to the September Business Outlook Survey reported nearly flat business activity this month. The survey’s indicators for general activity and new orders both improved from last month but recorded levels near zero. Firms reported continuing declines in shipments, employment, and hours worked. Indicators for the firms’ expectations over the next six months, however, improved notably this month, although the same firms forecast continued deceleration in production growth in the fourth quarter.

Indicators Suggest Flat Growth

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 5 points, to a reading of ‐1.9. Although this marks the fifth consecutive negative reading for the index, the index has been edging nearer to zero over the last three months (see Chart 1). Nearly 23 percent of firms reported declines in activity this month, down from 30 percent last month. The demand for manufactured goods, as measured by the current new orders index, improved 7 points from last month and recorded its first positive reading in five months. Shipments fell notably this month, however: The current shipments index fell 10 points to ‐ 21.2. Declines in inventories were more widespread this month, and firms reported continued declines in unfilled orders and shorter delivery times.

/images/z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders. The number of respondents who thought new orders were improving expanded after five months of contraction.

This index has many false recession warnings, it is currently near levels associated with past recessions. However, 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

/images/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.

Summary of all Federal Reserve Districts Manufacturing:

Richmond Fed (hyperlink to reports):

/images/z richmond_man.PNG

Kansas Fed (hyperlink to reports):

/images/z kansas_man.PNG

Dallas Fed (hyperlink to reports):

/images/z dallas_man.PNG

Philly Fed (hyperlink to reports):

/images/z philly fed1.PNG

New York Fed (hyperlink to reports):

/images/z empire1.PNG

Federal Reserve Industrial Production – Actual Data (hyperlink to report)

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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