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December 2012 Philly Fed Survey Way Over Expectations

Written by Steven Hansen

The Philly Fed Business Outlook Survey jumped back into expansion territory – after having been negative for 7 of the last 8 months. Key elements, unfilled orders and new orders both showed expansion.

This is a very noisy index which readers should be reminded is sentiment based. This month may be a Hurricane Sandy bounce.

The market was expecting the index value of -1.3 to 2.0 (actual was 8.1). Positive numbers indicate market expansion, negative numbers indicate contraction.

Manufacturing activity rebounded this month, according to firms responding to the December Business Outlook Survey. Following reported declines in business activity in late October and early November from the effects of Hurricane Sandy, most of the survey’s measures showed notable improvement this month. The surveyʹs broad indicators of future activity also showed improvement this month.

Indicators Suggest a Pickup at Year‐End The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of ‐10.7 in November to 8.1 this month. This is the highest reading since April and is slightly above the reading before the post‐storm decline in November (see Chart). The demand for manufactured goods picked up: the new orders index increased 15 points, from ‐4.6 in November to 10.7 this month. The current shipments index also improved notably, rising by 25 points.

Labor market conditions at the reporting firms improved marginally this month. The current employment index, at 3.6, registered its first positive reading in six months. The percentage of firms reporting increases in employment (20 percent) narrowly exceeded the percentage reporting decreases (16 percent). Firms also indicated an increase in the average workweek compared to last month.

/images/z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders – and both improved significantly this month.

This index has many false recession warnings. 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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