July 2012 Philly Fed Survey Continues to Show Contraction

Written by Steven Hansen

The Philly Fed Business Outlook Survey are “less bad” in the Philly region – but continue to show manufacturing contraction. Survey components new orders and unfilled orders again showed contraction – but also was “less bad”.

This is a very noisy index which readers should be reminded is sentiment based. However, trend lines are always important – and this index is without question deteriorating.

The market was expecting the index values between -10.0 to -13.0 (actual was -12.9 which indicates business is contracting)

Firms responding to the July Business Outlook Survey continued to report weak business conditions. Although the survey’s indicators for general activity, new orders, and shipments improved from June, they remained negative this month, suggesting overall declines in business. Firms also reported declines in employment this month and shorter work hours. The manufacturers reported near‐steady input and output prices this month. The survey’s indicators of activity over the next six months remained positive but moderated somewhat from June.

Indicators Suggest Continued Decreases

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of ‐16.6 in June to ‐12.9. This marks the third consecutive negative reading for the index (see Chart 1). Nearly 32 percent of the firms reported declines in activity this month, exceeding the 19 percent that reported increases.  Indexes for new orders and shipments remained negative but increased 12 and 8 points, respectively.

Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to ‐8.4, its second negative reading in three months. The percent of firms reporting decreases in employment (18 percent) exceeded the percent reporting increases (10 percent).

Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading.

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 contracted for the fourth month in a row – and is now seriously in negative territory.

This index has many false recession warnings, it is currently near levels associated with past recessions.  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 (dark blue bar) and US Census manufacturing shipments (lighter blue bar) to the Philly Fed Survey (yellow bar).

Comparing Surveys to Hard Data

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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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