Thursday, June 17, 2010

Federal Reserve Bank of Philadelphia's Business Outlook Survey: And A Little Bit Slower Now

First of all what is this?

It is a survey of manufacturing activity in eastern Pennsylvania, southern New Jersey, and all of Delaware.  Having started in 1968, it is the longest running survey of manufacturing by any Federal Reserve Bank.

So why are we looking at it?

This report is recognized for its timeliness, because the results are published in the same month it covers.  The region this Federal Reserve district covers is one of the most populated in all of the U.S., which gives it the extra-umph we need to care.  Furthermore, it's like the Empire State Manufacturing Survey because the Business Outlook Survey can provide a hint towards what the ISM Manufacturing Survey might show less than two weeks later.

So what exactly do they do?

At the beginning of each month the Philly Fed  mails out questionnaires to the top executives at 250 large firms.  They are asked about present conditions and their expectations for the next 6 months.  Responses are received by the tenth of the month with about half of the questionnaires returned on time.  The Philly Fed then comes up with a diffusion index (the percentage of all positive scores minus the percentage of the scores that are negative) which is interpreted the following way: A zero and we have half the responses reporting an increase and the other half reporting a decrease in manufacturing activity.  Above zero points to an expansion being under way, below zero and we're looking at a contraction.

Here is the most recent Business Outlook Survey 

First we should look at the General Business Activity Index. Why? Because it has maintained a fairly close correlation with the manufacturing ISM series.  A word of warning is that this index can be volatile, so any conclusions should be based on a three-month moving average.  Looking at the table we see that manufacturing is certainly slowing down, dropping from a reading of 21.4 in May to 8.0 in June.

Second take a look at the Six-Month outlook:
In this section first look at Capital Expenditures as it indicates whether business will be willing to expand or not in the next 6 months.  As you can see it fell from a rather anemic 7.7 in May to an even slower rate of expansion of 3.0 in June.  This is not a good sign because it means manufacturers are not confident that demand will be coming back from the dead (at least not any time soon). 
The second thing to notice here is the Number of Employees which is a positive 19.5 so manufacturers will still be looking to hire in the next six months but at a slower rate than previously expected (30.1).

Overall the results of this survey are rather disappointing as they foreshadow disaster for the ISM Manufacturing Survey. From the Philly Fed website on the labor market deterioration:
"Until this month, firms’ responses had been suggesting that labor market conditions were improving, but indexes for current employment and work hours were both slightly negative. For the first time in seven months, more firms reported a decrease in employment (18 percent) than reported an increase (17 percent). The largest percentage (62 percent), however, reported steady employment levels. The workweek index also declined into negative territory, its first negative reading in eight months"

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