Written by Steven Hansen
The Philly Fed Business Outlook Survey continues in negative territory – and has been negative for 9 of the last 10 months. Key element new orders and unfilled orders dropped further into contraction.
This is a very noisy index which readers should be reminded is sentiment based. The Philly Fed is becoming the most negative of all the Fed manufacturing surveys.
The market was expecting the index value of 1.5 to 2.0 (actual was -12.5). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturers responding to the February Business Outlook Survey reported declines in activity this month. Following reported growth in late 2012, indicators for general activity and new orders have now registered negative readings for the past two months. However, indicators for shipments and employment were slightly positive this month. The survey’s broad indicators of future activity edged higher this month.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading -5.8 in January to -12.5 this month (see Chart).* The demand for manufactured goods also showed slight declines this month: The new orders index declined from a reading of -4.3 in January to -7.8 in February. Despite negative readings for general activity and new orders, the shipments index showed improvement: The index remained positive and edged slightly higher to 2.4. The percentage of firms reporting increased shipments (25 percent) was slightly greater than the percentage reporting declines (22 percent).
Labor market conditions showed signs of stabilizing this month. The employment index increased from -5.2 in January to 0.9 this month, its first positive reading in eight months. The percentage of firms reporting employment increases (15 percent) narrowly exceeded the percentage reporting decreases (14 percent).
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Econintersect believes the important elements of this survey are new orders and unfilled orders – and both show worse contraction this month.
This index has many false recession warnings. 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
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):
Kansas Fed (hyperlink to reports):
Dallas Fed (hyperlink to reports):
Philly Fed (hyperlink to reports):
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New York Fed (hyperlink to reports):
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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