Written by Steven Hansen
The Philly Fed Business Outlook Survey moved lower, but remained in positive territory. This survey has been negative for 9 of the last 16 months. Key element new orders continued in expansion territory – but was not as strongly in expansion as last month.
This is a very noisy index which readers should be reminded is sentiment based. The Philly Fed historically is one of the more negative of all the Fed manufacturing surveys.
The market was expecting the index value of 10.0 (actual was 9.3). Positive numbers indicate market expansion, negative numbers indicate contraction.
Manufacturing firms responding to the August Business Outlook Survey indicated that regional manufacturing activity expanded this month. The survey’s broadest indicators for general activity and new orders were positive for the third consecutive month, although they fell back from higher readings last month. Responses indicated flat shipments and only slight increases in overall employment this month. The survey’s indicators of future activity, although not as high as in July, continue to suggest that firms expect continued growth over the next six months.
Indicators Suggest Continued Growth
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 19.8 (its highest reading since March 2011) to 9.3 this month (see Chart). The index has now been positive for three consecutive months. The percentage of firms reporting increased activity this month (28 percent) was greater than the percentage reporting decreased activity (19 percent).
Other current indicators suggest growth moderated this month. The demand for manufactured goods as measured by the current new orders index remained positive for the third consecutive month but fell 5 points to 5.3. The shipments index fell 15 points to just below zero, its first negative reading in three months. Both unfilled orders and delivery times indexes were negative this month, suggesting continued slack conditions.
Labor market indicators showed only modest improvement this month. The current employment index, at 3.5, fell 4 points but has been slightly positive for two consecutive months. The percentage of firms reporting increases in employment (19 percent) exceeded the percentage reporting decreases (16 percent).
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Econintersect believes the important elements of this survey are new orders and unfilled orders . Unfilled orders are “less good” and in contraction, with New Orders are “less good” but in expansion.
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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