The Philly Fed Business Outlook Survey improved and remained in expansion. Key elements remained in positive territory.

Analyst Opinion of the Philly Fed Business Outlook Survey

Although the survey index improved, the key element sales again declined while unfilled orders insignificantly improved. Overall, I do not consider this survey much different than 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 but has been more positive than the others recently.

The index moved from +8.5 to +16.6. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Econoday) 5.8 to 11.0 (consensus +9.3).

Results from the May Manufacturing Business Outlook Survey suggest continued growth for the region's manufacturing sector. The survey's indexes for general activity, shipments, and employment increased from their April readings. The new orders index remained positive but decreased modestly. The survey's future activity index, after falling in recent months, was little changed, while the firms' forecast for future employment improved.

Current Indicators Suggest Continued Growth

The diffusion index for current general activity increased from 8.5 in April to 16.6 this month (see Chart 1). Over 25 percent of the manufacturers reported increases in overall activity this month, while 9 percent reported decreases. The indexes for current shipments and new orders moved in opposite directions this month: The current shipments index increased 9 points, while the new orders index fell 5 points. The current inventories index fell 6 points to its first negative reading in four months.

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Econintersect believes the important elements of this survey are new orders and unfilled orders. New orders again declined but remains in expansion whilst unfilled orders modestly improved and is in expansion.

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This index has many false recession warnings.

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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New York Fed (hyperlink to reports):

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Federal Reserve Industrial Production - Actual Data (hyperlink to report):

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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).

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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.

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.