October 2012 Philly Fed Survey Has Very Good Improvement

Written by Steven Hansen

The Philly Fed Business Outlook Survey pushed into positive territory after 6 months of contraction. However, survey component new orders showed contraction – but just barely. Unfilled orders was  less bad – but still shows contraction.  Basically, if you look into the horses mouth – the horse is not as healthy as its outward appearance.

This is a very noisy index which readers should be reminded is sentiment based. However, trend lines are always important – and this index now has a short term improving trend.

The market was expecting the index value of -0.1 to 0.0 (actual was 5.7). Positive numbers indicate market expansion, negative numbers indicate contraction.

Firms responding to the October Business Outlook Survey reported a modest improvement in business activity this month. The survey’s indicators for general activity returned to positive territory, while new orders and shipments recorded levels near zero. But firms reported continuing declines in employment and hours worked. Indicators for the firms’ expectations over the next six months remained positive.

Indicators Suggest Modest Improvement

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased 8 points, to 5.7, marking the first positive reading since April (see Chart). A little over 28 percent of firms reported increases in activity this month, up from 21 percent last month. The demand for manufactured goods, as measured by the current new orders index, decreased 2 points, to -0.6. Shipments rebounded from last month but were roughly flat this month. The current shipments index increased 21 points, to -0.2; inventories were near steady; and firms reported continued declines in unfilled orders and shorter delivery times.

Labor market conditions at the reporting firms remained weak this month. The current employment index dipped 3 points, to -10.7, its lowest reading since September 2009. Twice as many firms reported decreases in employment (22 percent) as reported increases (11 percent). Firms also indicated fewer hours worked: The average workweek index, at -7.6, was negative for the seventh consecutive month.

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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 were improving declined.

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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