Written by Steven Hansen
The Philly Fed Business Outlook Survey fell and entered contraction territory. Key elements also were in contraction.
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 12.0 (consensus 8.0) versus the actual at -6.3. Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing activity was reduced in February, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, and shipments suggest moderate declines this month, but comments suggested that much of the weakness was attributable to the severe winter weather that affected the region during the survey period. Firms continued to add to their payrolls, but average work hours fell. Despite the weakness in current indicators, many of the surveyʹs indicators of future activity improved this month, reflecting optimism about continued growth over the next six months.
Indicators Suggest Reduced Activity This Month
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 9.4 in January to -6.3 this month (see Chart). This was the first negative reading of the index in nine months. The current shipments and new orders indexes also weakened this month. The demand for manufactured goods, as measured by the current new orders index, decreased from a reading of 5.1 to -5.2 this month. Shipments also fell, with its index falling 22 points to a reading of 9.9. Firms reported longer delivery times and an increase in inventories.
Labor market indicators were mixed this month. The current employment index remained positive for the eighth consecutive month but declined 5 points from January. More firms (21 percent) reported increases in employment than reported decreases (16 percent). Firms reported reduced work hours; however, the average workweek index remained negative for the second consecutive month, with more than one‐fifth of the firms reducing work hours.
Cost increases were slightly less widespread this month among reporting firms: The prices paid index decreased 5 points, to 14.2. But with respect to firms’ own manufactured goods, price increases were slightly more widespread this month: The prices received index increased 3 points, to 7.6.
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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
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.