June 2014 Philly Fed Business Outlook Improves

Written by Steven Hansen

The Philly Fed Business Outlook Survey improved marginally and remains solidly in expansion territory for the fourth month. Key elements were strong.

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 +10.0 to +19.0 (consensus 13.0) versus the actual at 17.8. Positive numbers indicate market expansion, negative numbers indicate contraction.

Manufacturing firms responding to the June Business Outlook Survey indicated that regional manufacturing activity expanded this month. The survey’s indicators for general activity, new orders, and shipments were positive for the fourth consecutive month and improved from their readings in May. Current employment was also higher among the reporting firms this month. The survey’s indicators of future activity improved notably, suggesting that firms are more optimistic about continued growth over the next six months.

Indicators Reflect Continued Growth

The diffusion index of current general activity increased from a reading of 15.4 in May to 17.8 this month. The index has remained positive for four consecutive months and is at its highest reading since last September (see Chart). The current new orders and shipments indexes also moved higher this month, increasing 6 points and 1 point, respectively.

Indicators also suggest improved labor market conditions this month. The employment index remained positive for the 12th consecutive month and increased 4 points. The percentage of firms reporting increases in employment (22 percent) remained higher than the percentage reporting decreases (11 percent). The workweek index was also positive for the fourth consecutive month and increased 4 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 at a faster 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

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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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