Philly Fed Business Outlook: A Moderate Contraction

Includes: DIA, SPY
by: Doug Short

Note from dshort: Today's update incorporates the 2012 annual revisions of the historical data published on January 12th.

The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows a moderate decline, moving from 4.6 last month to -5.8. Moreover, the 3-month moving average fell to -3.4, the seventh negative reading in eight months. Since this is a diffusion index, negative readings indicate contraction, positive indicate expansion. Here is the introduction from the Business Outlook Survey released today:

Manufacturing activity declined moderately this month, according to firms responding to the January Business Outlook Survey. Following reported increases in business activity in late 2012, most indicators fell back from the readings posted last month. The survey's broad indicators of future activity, however, showed some improvement this month. (Full PDF Report)

The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.

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In the next chart we see the complete series, which dates from May 1960. The average absolute monthly change across this data series is 7.9, which suggests that the 10.4 point change from last month carries additional significance.

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The next chart is an overlay starting in 2000 of the General Activity Index and the Future General Activity Index — the outlook six months ahead. The latest Future reading shows increased optimism despite the drop in current conditions.

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The Philly Fed General Activity Index continues to be a key indicator to watch closely.

Note on the Philly Fed's January revisions: Here is a chart illustrating the 2012 revisions of the historical data over the past few years. The general pattern has been for the expansion data to be lowered and the contraction data points to be raised. Essentially, the revisions have slightly smoothed the series. For more on the revisions, see this page on the Philly Fed website.

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