August 2012 Philly Fed Survey Is Less Bad

Written by Steven Hansen

The Philly Fed Business Outlook Survey are “less bad” in the Philly region – continuing to show manufacturing contraction. Survey components new orders again showed contraction – but also was “less bad”.  Unfilled orders continued to degrade staying in negative territory.

This is a very noisy index which readers should be reminded is sentiment based. However, trend lines are always important – and this index even though it is less bad, remains with a negative trend.

The market was expecting the index value of -5.0 (actual was -7.1) which indicates business is contracting)

Firms responding to the August Business Outlook Survey continued to report weakness in overall business conditions. The survey’s indicators for general activity and new orders remained negative for the fourth consecutive month, but both increased slightly from July. Firms also reported slight overall declines in employment and shorter work hours this month.  Indicators of expected activity over the next six months remained positive but moderated for the second consecutive month.

Indicators Suggest Continued Weakness

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 6 points, to a reading of ‐7.1. This marks the fourth consecutive negative reading for the index but also its highest reading since May.

Nearly 30 percent of firms reported declines in activity this month, exceeding the 22 percent that reported increases. Indexes for new orders and shipments remained negative. The new orders index improved one point, while the shipments index fell 3 points.  Labor market conditions at the reporting firms deteriorated slightly this month. The current employment index, at ‐8.6, remained near its reading in the previous month. The percent of firms reporting decreases in employment (15 percent) exceeded the percent reporting increases (7 percent). Firms also indicated fewer hours worked this month: The average workweek index increased 3 points but posted its fifth consecutive negative reading.

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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 fifth month in a row – and is 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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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):

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Kansas Fed (hyperlink to reports):

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Dallas Fed (hyperlink to reports):

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Philly 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)

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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