The Philly Fed Business Outlook Survey declined but remains in expansion. Key elements improved.

Analyst Opinion of the Philly Fed Business Outlook Survey

Consider this a stronger report than last month as key elements improved.

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 +12.9 to +9.4. Positive numbers indicate market expansion, negative numbers indicate contraction. The market expected (from Econoday) 11.2 to 22.0 (consensus +17.5).

Manufacturing activity in the region continued to grow but remained subdued, according to results from the December Manufacturing Business Outlook Survey. The survey's broad indicators were positive, but their movements were mixed this month: The general activity and shipments indicators fell from their readings last month, while the indicators for new orders and employment increased. The firms remained generally optimistic about future growth.

Current Indicators Remained Muted

The diffusion index for current general activity decreased from 12.9 in November to 9.4 this month, its lowest reading since August 2016 (see Chart 1). Over 26 percent of the manufacturers reported increases in overall activity this month, while 17 percent reported decreases. The new orders index increased 5 points to 14.5 but remains notably lower than its average reading for the year. The current shipments index decreased 12 points to 10.0, its lowest reading in 27 months. Both the unfilled orders and delivery times indexes were positive this month, suggesting higher unfilled orders and slower delivery times.

Econintersect believes the important elements of this survey are new orders and unfilled orders. New orders significantly declined but remains in expansion whilst unfilled orders modestly significantly declined and remained in contraction.

This index has many false recession warnings.

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):

New York Fed (hyperlink to reports):

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

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).

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.