April 2014 Philly Fed Business Outlook Well Above Expectations

Written by Steven Hansen

The Philly Fed Business Outlook Survey again improved significantly and is now well into expansion territory for the second month. Key elements are also expanding.

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 +3.0 to +14.0 (consensus 10.0) versus the actual at 16.6. Positive numbers indicate market expansion, negative numbers indicate contraction.

Manufacturing activity in the region increased in April, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment all remained positive and increased from their readings in March. Price pressures remain modest. The survey’s indicators of future activity reflected optimism about continued expansion over the next six months, although the indicators have fallen from higher readings in recent months.

Indicators Signal Growth This Month

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 9.0 in March to 16.6 this month, its highest reading since last September (see Chart). The index has now increased for two consecutive months, following the weather-influenced negative reading in February. The new orders and current shipments indexes also moved higher this month, increasing 9 points and 17 points, respectively.

Indicators suggest slightly improved labor market conditions this month. The employment index remained positive for the 10th consecutive month and increased 5 points, suggesting overall improvement. The percentage of firms reporting increases in employment (20 percent) edged out the percentage reporting decreases (13 percent). The workweek index was also positive for the second consecutive month, edging 2 points higher.

The survey’s price diffusion indexes continue to suggest overall moderate rates of increase. The prices received index was unchanged at 4.3. Nearly 76 percent of the firms reported no change in their final goods prices, and the percentage of firms reporting increases (13 percent) was only slightly greater than the percentage reporting decreases (9 percent). The prices paid index edged slightly lower, to 11.3, its third consecutive month of decline. Seventeen percent of the firms reported higher input prices, down from 19 percent in March.

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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders are expanding (but the rate of expansion has declined), with new orders expanding and strengthening.

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

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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):

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Kansas Fed (hyperlink to reports):

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Dallas Fed (hyperlink to reports):

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Philly Fed (hyperlink to reports):

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New York Fed (hyperlink to reports):

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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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