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January 2014 Philly Fed Business Outlook Improves, Internals Mixed

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The Philly Fed Business Outlook Survey strengthened marginally but remains in positive territory. Key element new orders softened but 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 8.0 (actual was 9.4). Positive numbers indicate market expansion, negative numbers indicate contraction.

Manufacturing growth in the region continued in January, 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 continued moderate growth. The survey’s indicators of future activity moderated but continue to suggest general optimism about growth over the next six months.

Indicators Suggest Continued Moderate Growth

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a revised reading of 6.4 in December to 9.4 this month. The index has now been positive for eight consecutive months.

The current shipments and new orders indexes remained positive but moved in opposite directions compared with December. The demand for manufactured goods, as measured by the current new orders index, decreased from a revised reading of 12.9 to 5.1 this month. Shipments continued to expand, and its index edged slightly higher to a reading of 12.1.

Labor market indicators showed some improvement this month. The current employment index increased 6 points from its revised reading in December. Twenty-three percent of the firms reported increases in employment in January, which is slightly higher than the 18 percent that reported increased employment last month. Firms reported reduced work hours, with the average workweek index falling from 4.8 to -5.3.

Cost pressures were slightly more widespread this month among reporting firms: The prices paid index increased 2 points, to 18.7. But with respect to firms’ own manufactured goods, price increases were less widespread this month: The prices received index decreased 6 points, to 5.1.

/images/z philly fed1.PNG

Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders improved while remaining in negative territory, with new orders weakening while 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 (long dark blue bar) and US Census manufacturing shipments (long pink 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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