Does a 58-Point Increase in the Philly Fed Forecast Index Signal the End of Recession?

The Philadelphia Fed reported yesterday that the Six-Month Indicators Show Continued Improvement:

Broad indicators of future activity showed improvement again this month. The future general activity index remained positive for the fifth consecutive month and increased 11 points, from 36.2 in April to 47.5. The index has now increased 33 points in the past two months (see chart above, click to enlarge). The indexes for future new orders and shipments also improved, increasing 13 and 14 points, respectively.

For the first time in eight months, the percentage of firms expecting employment to increase over the next six months exceeded the percentage expecting declines (26 percent versus 16 percent). The future employment index jumped 22 points, to its highest reading since last September. The six-month capital expenditure index showed a modest four-point improvement, increasing for the second consecutive month; at -0.2 the index is 22 points higher than its record low in March.

Notice in the chart above that in 2001 a 60-point increase in the forecast index signalled the end of the 2001 recession. Hopefully the recent 58-point increase in the future activity index since December 2008 is signalling the end of the current recession.

According to the Philadelphia Fed, "Most broad indicators for future business conditions improved markedly again this month, suggesting that an increasing number of the region's manufacturing executives expect a recovery in business activity before the end of the year."

Comments

[ciel:]

The manufacturer's responses to May's special questions were especially encouraging:

Special Questions (May 2009)
1. Over the past two months, how would you characterize the underlying demand for your manufactured products?*
Increasing significantly
2.4%
Increasing modestly
22.0%
No change
19.5%
Decreasing modestly
31.7%
Decreasing significantly
24.4%
2. If you are currently experiencing declines in demand, how would you characterize the declines?
Declines have moderated.
31.8%
Declines have continued at a steady pace.
15.3%
Declines have been more severe.
16.6%
NR
36.5%
3. When do you expect to see an increase in demand at your company?*
One month
2.4%
2-3 months
14.1%
4-5 months
20.0%
6 months or more
44.7%
NR
18.8%

OK, my comment above was a bit of sarcasm.

I'll concede that in the last recession, such a pervasive and pronounced increase in the 6-month expectations portion of the index presaged an end to that recession by about six months... which, if the past is indeed an indication of future results, would put the end to our current recession somewhere around November of this year.

Wait a min' ... you wrote, "in the chart above that in 2001 a 60-point increase in the forecast index signalled the end of the 2001 recession."

Sir, are we looking at the same chart?

May 22 03:45 AM

[AJB7:]

While the Philly Fed's recent six month forcast in economic activity diffusion index has increased comparably to that in early 2001, you may note that stocks continued to decline for two years after that increase in 2001. If the 2001-2003 six month economic forcast-stock market association holds, we may expect stocks to begin the next bull market when? Ummm..... according to your chart, it seems like the end of 2010.

I'm not trying to be critical. The stock market anticipated all previous recession recoveries except the last one. We don't know yet whether that case was a one-time exception or the begining of a new pattern. Personally, I find the official dating of the 2001 recession was suspect on a number of counts (which explains the anomolous stock market relationship), but that is for another post. Interesting chart though, thanks.

May 22 06:17 AM