Philly Fed Business Outlook: Manufacturing Activity Weakened

by: Doug Short

Note from Doug: Having lived for two years in Paoli, PA, a suburb west of Philadelphia just south of Valley Forge, I have a special interest in this regional indicator. But, more importantly, it gives a generally reliable clue as to direction of the broader Chicago Fed's National Activity Index.

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. The latest gauge of General Activity dropped from to -5.2 from last month's 1.3. The 3-month moving average came in at -0.6, the eleventh negative reading in twelve months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Here is the introduction from the Business Outlook Survey released Thursday:

Manufacturing firms responding to the monthly Business Outlook Survey suggest that regional manufacturing activity weakened this month. All of the survey’s broadest current indicators were negative this month, indicating weaker conditions compared with April. The survey’s indicators of future activity improved, however, and suggest that firms expect overall growth over the next six months....


The May Business Outlook Survey indicates some weakening of activity this month, with all of the broad indicators recording negative diffusion indexes. The survey’s indicators have failed to exhibit any sustained pattern of growth in recent months. The indicators for general activity, new orders, and shipments suggest weaker conditions this month, and firms reported employment reductions. Price pressures continue to be modest. Despite weaker current indicators, firms continue to expect positive growth over the next six months. (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. We can see periods of contraction in 2011 and 2012. At this point the contraction in 2013 is shallower, thanks to positive monthly readings in March and April. The next few months will bear close watching.

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 6.5 point change from last month has little statistical significance.

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.

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