Written by Steven Hansen
The Philly Fed Business Outlook Survey jumped back into negative territory – and has been negative for 8 of the last 9 months. Key element new orders dropped well into contraction, while unfilled orders was less bad.
This is a very noisy index which readers should be reminded is sentiment based. The Philly Fed is becoming the most negative of all the Fed manufacturing surveys.
The market was expecting the index value of 1.0 to 5.2 (actual was -5.8). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. Following reported increases in business activity in late 2012, most indicators fell back from the readings posted last month. The surveyʹs broad indicators of future activity, however, showed some improvement this month.
Indicators Suggest Slight Declines The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 4.6 in December to ‐5.8 this month (see Chart).* The demand for manufactured goods showed slight declines this month: The new orders index declined from a revised reading of 4.9 in December to ‐4.3 in January. The shipments index remained slightly positive but suggests no overall growth — the percentage of firms reporting increased shipments was mostly offset by the percentage reporting decreased shipments (26 percent). The indexes for both delivery times and unfilled orders recorded slightly negative readings this month.
Labor market conditions at reporting firms deteriorated this month. The employment index, at ‐5.2, fell from ‐0.2 in December. The percentage of firms reporting decreases in employment (16 percent) exceeded the percentage reporting increases (11 percent). Firms also indicated a decrease in the average workweek compared with last month.
Price Indexes Moderate – The indexes for prices received for respondents’ own manufactured goods and prices paid for purchased inputs suggest reduced price pressures this month. The prices received index decreased 14 points, from 12.4 to ‐1.1. The percentage of firms reporting lower prices for their own manufactured goods (9 percent) was slightly greater than those reporting higher prices (8 percent). The prices paid index fell 9 points; 20 percent of firms reported higher costs, compared with 27 percent last month.
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Econintersect believes the important elements of this survey are new orders and unfilled orders – and both show contraction 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
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):
Kansas Fed (hyperlink to reports):
Dallas Fed (hyperlink to reports):
Philly Fed (hyperlink to reports):
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New York Fed (hyperlink to reports):
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.