The Philadelphia Fed manufacturing report came in at -2.9% vs. a Bloomberg Econoday consensus of 5.0. Supposedly this shows “hints of life for a factory sector”.


The Philly Fed is a widely read report for leading indications on the manufacturing sector but maybe they should consider offering a composite headline index as well as the general business conditions index. The latter, based not on a composite of components but the answer to a single subjective question, came in at minus 2.9 for July in contrast, for a second month in a row, to readings in the body of the report.

New orders jumped to 11.8 from two months of prior contraction in improvement confirmed by backlog orders which surged from minus 12.6 to plus 1.9 for the first positive reading in a year. Strength in orders is the key and it points to higher shipments and employment ahead. And shipments this month are already active, at plus 6.3 for the first positive reading since March. Employment, however, remains weak, at minus 1.6 with the workweek also still soft, at minus 3.6 which however is an improvement from recent readings. Price data are soft with inputs showing less pressure and selling prices dead flat.

The headline in this report has given two straight head fakes, showing strength in June that was not supported by the details and now weakness in what looks to be a very strong July. Taken all together, this report is offering hints of life for a factory sector that, held back by weak exports and trouble in the energy sector, has been no better than flat this year.

Philadelphia Fed Current and Future Index

Philly Fed 2016-07-07

The above chart from the July 2016 Manufacturing Business Outlook Survey

Hints of Nothingness

Month to month volatility while hovering around the zero mark does not indicate anything but measurement volatility.

As is typical, Bloomberg reads too much into such volatility. Every jump in new orders is supposed to be the signal.

There were no head fakes last month or this month. This is a diffusion index where an small increase in new orders at a small firm balances out a larger decline in new orders at a large company (or vice versa).

Given the nature of these diffusion indexes, there needs to be a trend before we can understand what’s likely happening.

The trend, if anything, isn’t good. “For nine of the past 11 months, this diffusion index has been negative,” as noted in the report.

The report did state “Future Indexes Signal Optimism”. Did that influence the Econoday commentary?

A quick glance at the chart shows perpetual optimism except at economic lows. And except for being a contrary indicator at recession bottoms, the six-month look-ahead forecast is completely useless.

Mike “Mish” Shedlock