Written by Steven Hansen
The Philly Fed Business Outlook Survey again significantly declined and plunges deeper into negative territory.
Analyst Opinion of the Philly Fed Business Outlook Survey
Overall, this report was much worse than last month’s report with key elements declining and in contraction.
This is a very noisy index which readers should be reminded of is sentiment-based. The Philly Fed historically is one of the more negative of all the Fed manufacturing surveys but has been more positive than the others recently.
The index moved from minus 12.7 to minus 56.6. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Econoday) -50.0 to -22.0 (consensus -29.5).
Manufacturing firms reported continued weakening in regional manufacturing activity this month, according to results from the Manufacturing Business Outlook Survey. The survey’s current indicators for general activity, new orders, and shipments once again fell sharply this month to long-term low readings, coinciding with ongoing developments related to the coronavirus pandemic. The indexes for employment and the average workweek, which had both remained positive last month, fell into negative territory this month. The firms expect the current letup in manufacturing activity to last less than six months, as the broadest indicator of future activity strengthened further from last month’s reading; furthermore, the firms continue to expect overall growth in new orders, shipments, and employment over the next six months.
Most Current Indicators Reach Long-Term Lows
The diffusion index for current activity declined strikingly for the second consecutive month from -12.7 in March to -56.6 this month, falling below its nadir during the Great Recession (see Chart 1). This is the current activity index’s lowest reading since July 1980. The percentage of firms reporting decreases (60 percent) this month far exceeded the percentage reporting increases (4 percent). The index for new orders fell further into negative territory, from -15.5 to -70.9, its lowest reading ever. Also reaching an all-time low, the current shipments index fell 74 points after remaining slightly positive in March. Unfilled orders fell 6 points further into negative territory, while delivery times rose 13 points to 4.1, suggesting longer delivery times.
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Econintersect believes the important elements of this survey are new orders and unfilled orders. New orders significantly declined and are now deeper in contraction whilst unfilled orders also significantly declined and are now deeper in contraction.
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This index has many false recession warnings.
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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New York Fed (hyperlink to reports):
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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 (red bar) to the Philly Fed survey (yellow bar).
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 the 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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