Written by Steven Hansen
The Philly Fed Business Outlook Survey declined but remains solidly in expansion territory for the sixth month. Key elements went the other direction and improved. Should we watch the internals or the headline index?
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 +15.0 to +29.0 (consensus 23.0) versus the actual at 22.5. Positive numbers indicate market expansion, negative numbers indicate contraction.
Firms responding to the Manufacturing Business Outlook Survey indicated continued growth in the region’s manufacturing sector in September. Although the current activity index fell from its relatively high reading in August, the other broad indicators increased from their readings last month. The survey’s indicators for future manufacturing conditions reflect general optimism about growth in activity and employment over the next six months.
Indicators Reflect Continuing Growth
The diffusion index for current activity fell from a reading of 28.0, its highest reading since March 2011, to 22.5 this month (see Chart). The current new orders and shipments indexes edged higher this month, however, increasing 1 point and 5 points, respectively. Indexes for both unfilled orders and delivery times were positive this month, suggesting continued strengthening conditions.
The survey’s indicators for labor market conditions suggest notable improvement this month. The employment index increased 12 points to its highest reading since May 2011. The percentage of firms reporting increases in employment (26 percent) exceeded the percentage reporting decreases (5 percent). The workweek index was positive for the seventh consecutive month but fell nearly 9 points.
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders now shows 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.