Philly Fed Business Survey Continues to Show Expansion in January 2012

The Philly Fed Business Outlook Survey headlines for January 2012  show the index improved slightly – and it remains in growth territory.  New orders are less good but still in expansion territory.

Results from the Business Outlook Survey suggest that regional manufacturing activity continued to expand at a moderate pace in January. All of the broad indicators remained positive this month, and firms continued to report increases in employment.  Firms polled reported higher input prices this month, with a notable share of firms reporting price increases for their own manufactured goods. The survey’s broad indicators of future activity improved again this month.

Indicators Suggest Continued Growth

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged up slightly from a revised reading of 6.8 in December to 7.3 in January.* The demand for manufactured goods showed continued growth this month: The new orders index remained positive for the fourth consecutive month but declined from a revised reading of 10.7 in December to 6.9 this month. The shipments index also remained positive but fell 3 points. The indexes for both delivery times and unfilled orders recorded slightly negative readings this month.

Firms’ responses continue to suggest that labor market conditions are improving.  The current employment index has now been positive for five consecutive months but was virtually unchanged from last month’s reading. The percentage of firms reporting an increase in employment (21 percent) was higher than the percentage reporting a decline (10 percent). Firms reporting a longer workweek (23 percent) only narrowly outnumbered those reporting a shorter one (18 percent).

Econintersect believes the important elements of this survey are new orders and unfilled orders. The number of respondents who thought new orders and unfilled orders were improving grew this month.

Although this index has many false recession warnings, it is currently above levels associated with past recessions.   Every month, a special question is asked – and the following graph shows the respondents answers to the factors that are influencing hiring plans over the next 12 months:

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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