Federal Reserve's regional bank indices continue to show a still-expanding MFG sector. As of March, there are no negative readings for the headline, the jobs component, or the outlook for any of the six regional Fed surveys. The Fed surveys say conditions are improving across each of these five Fed districts.
The Federal Reserve System has five regions out the 12 that publish monthly readings on their local manufacturing or services sectors. Richmond publishes an index on MFG and Services, bringing the total to six surveys each month. Pooled together, these surveys offer a preview on the national ISM survey as well as a look at how manufacturing is doing nationally. There are other regional indices, but the Fed reports are always topical.
To aggregate the results from these surveys, we look at the period since 2004. We rank each index over each observation in the range assigning each the value of its rank in place of its raw reading. The range of values is from high to low. We calculate the queue percentile standing for each of the three indices: the overall index, employment and the outlook. Then we take an average and we calculate the aggregate. The average gives us the average percentile standing to summarize the six regional indices. The index tells the percentage of the time that the index -on average- stands lower.
A 100% reading is the highest possible a 0% is the lowest. The raw diffusion measures can be compared to tell us the net proportion of the indices that are doing better each month. We present calculations of the proportion of the regional measures that did better on various horizons. These methods allow us to analyze a nice set of six Fed indices in one fell swoop.
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The data in the top panel are based on changes in the percentile standings of the six regional observations. As of March 50% of the regional indices are rising, month-to-month 50% of the employment indices improved in March but only 20% of the outlook indices improved. This might seem to suggest a weakening. But it is only evidence of less widespread acceleration which is different from weakness.
In the lower panel of the table, we look at the simple averages of the monthly percentile standings of the regional measures. The results are impressive. The average standing across the Fed regions is a 77.1% standing. That means on average the Fed regions are higher only 23% of the time. This figure is barely lower than in February and is still higher than it was January. Employment's average reading was 79.8% and it continues to rise steadily. On average, employment in the various Fed regions is higher only 21% of the time. The outlook reading is the weakest of the lot on average at 63.9% and it has slipped in Feb from January and in March from February- something to watch.
What the Fed regional index shows is consistent with acceleration in MFG. Since all the regional indices are still positive we know that growth continues. The lower headline index speaks to the some fall off but not much since the March-February levels are still solidly higher than January. The decline in the outlook indices speaks to some coming slowing. And the fact that employment indices are still improving is in keeping with their usual lagging behavior in a period of recovery.
The chart plots the percentile queue standing for the ISM along the average standing for the Fed districts. We have plotted the March 2012 ISM as the Feb value to enable the calculations.
The average of the Fed regions' diffusion indices, the employment and outlook readings all have topped out between 85 and 90 - remember these series are constructed averages of six regions so they may never hit their potential highs and lows. The current readings are still very strong. The regional indices are quite cyclical and do not stay at the highly elevated readings for extended periods. For these reasons, the current regional average ranking percentile of 77.1% for the index, 79.8% for employment and to a lesser extent 63.5% are to be considered quite strong values.
The outlook indices: One clear gain in this process is an outlook index for the ISM. The ISM itself does not have one but the five regional Fed MFG surveys each have one. And the evidence is that it is a good indicator. It tends to move in advance of the current index. From 2005 -2006 it signaled a slowdown. Then it rose to early 2007 when MFG picked up. From Oct 2007 through November 2008, it did not lead but in fell in concert with the overall index. The outlook index did rise in late 2008 ahead of the headline index and lead it higher until Sept 2009 when it hit and stayed on a plateau. From Feb 2010 to date, the outlook and headline indices have moved more in tandem.
The outlook index either puts a stamp of approval on the current trend or it warns of a new direction. This month's erosion in the outlook is the first significant divergence between the headline and the outlook in two years. It is not yet large enough to be a signal, but we want to watch this to see if it becomes a new slowdown signal.
The Fed regional surveys are consistent with continuing growth and accelerating job growth. While some recent economic data have turned somewhat uneven, unevenness is the by-product of an economy as it changes speeds. Manufacturing has been strong recently and it may be in the process of slowing to a pace that is more sustainable, rather than heading for a slump.
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