Written by Steven Hansen
The Philly Fed Business Outlook Survey remains in contraction. Key elements marginally declined. The only other manufacturing survey released so far for this month is in contraction.
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 but has been more positive then the others recently.
The index declined from -1.6 to -1.8. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Bloomberg) 0.0 to 6.5 (consensus +3.0).
Firms responding to the Manufacturing Business Outlook Survey continued to report tenuous growth this month. The indicator for general activity was essentially unchanged in May and remained slightly negative. Other broad indicators also reflected general weakness in business conditions. The indicator for employment improved but remained negative. Manufacturers’ forecasts of future activity tempered slightly from last month, overall, but continue to suggest confidence in future growth.
Current Indicators Remain Weak
The diffusion index for current activity was essentially unchanged at -1.8 this month. The index has registered a negative reading in eight of the last nine months (see Chart). The current new orders index decreased for the second consecutive month, from 0.0 to -1.9 this month. Conversely, the current shipments index rose 10 points; however, the percentage of firms reporting a decline in shipments narrowly exceeded the percentage reporting an increase. As with the other broad indicators this month, the unfilled orders and delivery time indexes both remained in negative territory. The indicator for inventories rose notably to its highest reading in nine months but still registered a negative reading.
The survey’s indicators of employment reflect similar weakness in May. Despite improving 15 points this month, the employment index registered its fifth consecutive negative reading, at -3.3. More than 69 percent of the firms reported no change in employment, but the percentage reporting decreases (17 percent) exceeded the percentage reporting increases (14 percent). After a sharp drop last month, the average workweek index ticked up 1 point but remained negative.
z philly fed1.PNG
Econintersect believes the important elements of this survey are new orders and unfilled orders . Both new orders and unfilled orders declined with new orders showing no growth and unfilled orders remaining in contraction.
This index has many false recession warnings.
Summary of all Federal Reserve Districts Manufacturing:
Richmond Fed (hyperlink to reports):
z richmond_man.PNG
Kansas Fed (hyperlink to reports):
z kansas_man.PNG
Dallas Fed (hyperlink to reports):
z dallas_man.PNG
Philly Fed (hyperlink to reports):
z philly fed1.PNG
New York Fed (hyperlink to reports):
z empire1.PNG
Federal Reserve Industrial Production – Actual Data (hyperlink to report):
Holding this and other survey’s Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (dark blue bar) and US Census manufacturing shipments (lighter blue bar) to the Philly Fed survey (yellow bar).
Comparing Surveys to Hard Data:
z survey1.png
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.
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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