Philly Fed Business Outlook: Manufacturing Conditions Improved

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 rose to 19.8 from the previous month's 12.5. The 3-month moving average came in at 5.0, up from 2.9 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's headline number is the highest since March 2011, and the 3-month MA trend is well above its interim low set in July of last year. Here is the introduction from the Business Outlook Survey released yesterday:

Manufacturing firms responding to the July Business Outlook Survey indicated that regional manufacturing conditions improved this month. All of the survey’s broadest current indicators were positive, and most showed improvement from last month. The survey’s indicators of future activity also showed a notable rise, suggesting that firms expect a pickup in business over the next six months....


The July Business Outlook Survey indicates a pickup of manufacturing activity this month, with most broad indicators, including employment, pointing to improvement over June. Firms’ responses suggest an improvement in the six-month outlook, and firms were more optimistic about adding to payrolls over the next six months. (Full PDF Report)

Yesterday's 19.8 was substantially higher than the 7.8 forecast at

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.

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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 4.7 point change from last month has little statistical significance. The average absolute monthly change in the 3-month MA is 4.0, which likewise suggests that the latest 2.2 change is statistically insignificant.

(Click to enlarge)

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.

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