Written by Steven Hansen
The Philly Fed Business Outlook Survey declined marginally but remains solidly in expansion territory for the third month. Key elements were mixed.
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 +8.0 to +22.0 (consensus 14.3) versus the actual at 15.4. Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing firms responding to the May 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 third consecutive month, although they fell slightly from higher readings last month. Employment continued to increase for the reporting firms. The survey’s indicators of future activity improved, suggesting that firms remain optimistic about continued growth over the next six months.
Indicators Reflect Continued Growth
The diffusion index of current general activity decreased slightly from a reading of 16.6 in April to 15.4 this month. The index has remained positive for three consecutive months, following the weather-influenced negative reading in February (see Chart). The new orders and current shipments indexes also remained positive but moved lower this month, decreasing 4 points and 9 points, respectively.
Indicators suggest slightly improved labor market conditions this month. The employment index remained positive for the 11th consecutive month but increased only 1 point. The percentage of firms reporting increases in employment (19 percent) remained higher than the percentage reporting decreases (11 percent). The workweek index was also positive for the third consecutive month but edged 2 points lower.
The survey’s price diffusion indexes suggest that price increases were more widespread this month. The prices received index, reflecting firms’ own final goods prices, increased notably, from 4.3 to 17.0. This is the highest reading since May 2011. Although the percent of firms that reported receiving higher prices (18 percent) exceeded the percentage reporting lower prices (1 percent), 79 percent of the firms reported steady prices. The prices paid index was also higher, increasing 12 points to 23.0, but followed three consecutive months of decline in the index.
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders are now contracting, with new orders expanding but at a slower 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.