Written by Steven Hansen
The Philly Fed Business Outlook Survey growth declined and is now suggesting weaker growth – however this is the eleventh month in a row of expansion. Key elements remain in expansion. This survey came in well under expectations.
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 but has been strongly positive this year. Note that the historical data for the Manufacturing Business Outlook Survey was revised to account for new seasonal adjustment factors as of January 8, 2015. The graphs in information in this post have been adjusted accordingly [the adjustment does not really change the relative values of this survey versus the other regional Fed surveys].
The market was expecting the index value of +16.0 to +29.3 (consensus 20.0) versus the actual at 6.3. Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing activity in the region increased modestly in January, according to firms responding to this month’s Manufacturing Business Outlook Survey. The survey’s current indicators for general activity and new orders fell from their readings in December, suggesting a slower pace of growth. Firms reported continued moderation in price pressures, attributable to lower energy costs. Overall, firms reported that lower energy prices were having overall net positive effects on manufacturing business. The survey’s indicators of future activity show continued optimism about continued growth over the next six months.
Indicators Suggest Slower Pace of Growth
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased 18 points, from a revised reading of 24.3 in December to 6.3 this month (see Chart 1).* Demand for manufactured goods, as measured by the current new orders index, decreased 5 points, from a revised reading of 13.6 last month to 8.5 this month. Shipments also fell, with its index falling 22 points to -6.9, its first negative reading since February 2014. Firms reported shorter delivery times and a decrease in unfilled orders this month, on balance.
Firms’ responses suggest weaker labor market conditions in January. The percentage of firms reporting a decrease in employees (15 percent) exceeded the percentage reporting an increase (13 percent) for the first time in 19 months. The current employment index fell 10 points, from 8.4 to -2.0. Firms also reported reductions in the workweek: The percentage of firms reporting a shorter workweek (23 percent) was greater than the percentage reporting a longer workweek (16 percent).
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders returned deeply into contraction territory, and new orders expansion continued at a much lower rate.
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.