Written by Steven Hansen
The Philly Fed Business Outlook Survey growth jumped and continues well into expansion territory for the ninth month. Key elements remain in expansion.
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 +13.0 to +25.8 (consensus 18.0) versus the actual at 40.8. Positive numbers indicate market expansion, negative numbers indicate contraction.
Responses to the Manufacturing Business Outlook Survey suggest that regional manufacturing activity increased notably in November. The survey’s broad indicators for new orders and shipments showed similar improvement this month. Responding firms also indicated that employment was higher this month. In addition, the broadest indicator of future activity suggests that firms expect growth to continue over the next six months.
Current Indicators Suggest Pickup in Growth
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 20.7 in October to 40.8 this month and has now been positive for nine consecutive months (see Chart). This was the highest reading since December 1993. The percentage of firms reporting increased activity this month (49 percent) was significantly greater than the percentage reporting decreased activity (9 percent).
Both the current new orders and shipments indexes rose from their readings in October. The current new orders index, which reflects the demand for manufactured goods, increased 18 points, to 35.7. Over 44 percent of the firms reported a rise in new orders, compared with 36 percent last month. Labor market indicators showed improvement this month. The current employment index rose 10 points in November, to 22.4, and hit a 3½ year high. Twenty-nine percent of the firms reported increases in employment compared with 20 percent that reported increased employment last month. Firms also reported higher work hours, with the average workweek index rising from -1.3 to 7.8 this month.
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders continues in expansion, and new orders are showing an improved rate of expansion.
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.