Written by Steven Hansen
The Philly Fed Business Outlook Survey softened moderately but remains in positive territory. This survey has been negative for 9 of the last 19 months. Key element new orders also softened but also remains 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 5.0 to 11.9 (actual was 6.5). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing growth in the region continued in November but did not match the pace of growth in the preceding month, 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 positive, signifying growth, but readings for each fell from October. The survey’s indicators of future activity also moderated but continue to suggest general optimism about growth over the next six months.
Indicators Suggest Modest Expansion
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, declined from 19.8 in October to 6.5 this month. The index has now been positive for six consecutive months. The percentage of firms reporting increased activity this month (30 percent) was greater than the percentage reporting decreased activity (24 percent).
Both the current shipments and new orders indexes remained positive but fell from their readings in October. The demand for manufactured goods, as measured by the current new orders index, decreased 16 points, to 11.8. Nearly 35 percent of the firms reported a rise in new orders, compared with 41 percent last month. Shipments continued to expand, but its index fell 15 points, to 5.6.
Labor market indicators showed little improvement this month. The current employment index fell 14 points from its reading in October (which was at a two-year high), to 1.1. Nearly 13 percent of the firms reported increases in employment, which is lower than the 23 percent that reported increased employment last month. Firms, on balance, reported lower work hours, with the average workweek index falling from 8.5 to -8.6 this month.
Cost pressures were slightly more widespread this month among reporting firms: The prices paid index increased 8 points, to 29.9. But with respect to prices received for manufactured goods, 15 percent of the firms reported higher prices, and 5 percent reported lower prices. The prices received index decreased 4 points, to 10.0.
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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 softened, with only new orders remaining in 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.