Written by Steven Hansen
The Philly Fed Business Outlook Survey improved strongly and remains solidly in expansion territory for the fifth month. Key elements were positive, however it was not logical that new orders strongly accelerated, and unfilled orders marginally decelerated.
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 -12.0 to +21.0 (consensus 16.9) versus the actual at 23.9. Positive numbers indicate market expansion, negative numbers indicate contraction.
Firms responding to the Business Outlook Survey indicated continued expansion in the region’s manufacturing sector in July. The survey’s indicators for general activity, new orders, shipments, and employment were all positive this month and increased from their readings in June. The survey’s indicators of future activity also increased or stayed at high levels, suggesting that firms remain optimistic about continued growth over the next six months.
Activity Index at Highest Level Since 2011
The diffusion index of current general activity increased from a reading of 17.8 in June to 23.9 this month. The index has remained positive for five consecutive months and is at its highest reading since March 2011 (see Chart). The current new orders and shipments indexes increased notably this month, increasing 17 points and 19 points, respectively. Both unfilled orders and delivery times indexes were positive for the second consecutive month, suggesting continued strengthening conditions.
The current indicators for labor market conditions also suggest improved conditions this month. The employment index remained positive, and, although it increased less than 1 point, it has improved for four consecutive months. The percentage of firms reporting increases in employment (24 percent) exceeded the percentage reporting decreases (12 percent). The workweek index was positive for the fifth consecutive month and increased 5 points.
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Both unfilled orders and new orders are expanding but the rate of expansion of unfilled orders declined.
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.