Written by Steven Hansen
The Philly Fed Business Outlook Survey jumped back into positive territory – after last month’s venture into contraction. This survey has been negative for 9 of the last 14 months. Key element new orders is well into expansion territory.
This is a very noisy index which readers should be reminded is sentiment based. The Philly Fed historically is one of the more negative of all the Fed manufacturing surveys.
The market was expecting the index value of -0.2 to 2.0 (actual was 12.5). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing firms responding to the monthly Business Outlook Survey indicated that regional manufacturing activity increased this month. Most of the survey’s broadest current indicators were positive this month, suggesting an improvement in business conditions. The survey’s indicators of future activity continue to suggest that firms expect growth over the next six months.
Indicators Suggest Improvement
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‑5.2 in May to 12.5, its highest reading since April 2011 (see Chart). The percentage of firms reporting increased activity this month (34 percent) was greater than the percentage reporting decreased activity (22 percent).
Other current indicators showed similar notable improvement this month. The demand for manufactured goods as measured by the current new orders index increased, from ‑7.9 to 16.6. The shipments index also moved back into positive territory, rising 13 points to 4.1.
Labor market conditions showed continued weakness, however, with indexes suggesting lower employment among the reporting manufacturers. Although it increased 3 points to ‑5.4, the employment index remained negative for the third consecutive month. The percentage of firms reporting employment decreases (20 percent) exceeded the percentage reporting increases (15 percent).
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Both New Orders and Unfilled orders are “more good” with New Orders returning strongly into positive territory.
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.