Written by Steven Hansen
The Philly Fed Business Outlook Survey improved strongly and remains in positive territory. This survey has been negative for 9 of the last 17 months. Key element new orders strengthened in 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 8.0 to 9.0 (actual was 22.3). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing activity picked up in September, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were all positive and higher than in August. The survey’s indicators of future activity were significantly higher, suggesting improved optimism about growth over the next six months.
Indicators Suggest Expansion
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 9.3 in August to 22.3 this month (see Chart). The index has now been positive for four consecutive months and is at its highest reading since March 2011. The percentage of firms reporting increased activity this month (36 percent) was greater than the percentage reporting decreased activity (14 percent).
The demand for manufactured goods, as measured by the current new orders index, increased 16 points, to 21.2. Shipments rebounded from last month: The current shipments index increased 22 points. The diffusion indexes also suggest that, on balance, inventories and deliveries were near steady this month, while unfilled orders increased slightly.
Labor market indicators showed improvement this month. The current employment index increased 7 points, to 10.3, its highest reading since April of last year. The percentage of firms reporting increases in employment (21 percent) exceeded the percentage reporting decreases (10 percent). Firms also reported a longer average workweek compared with last month, and the index increased 15 points, to 12.2.
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Both unfilled orders and new orders have improved substantially, and are both in expansion.
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.