On the surface the Philadelphia Fed Manufacturing index was in positive territory at 2. Peeking under the hood, a significant number of problems become visible.

Philadelphia Fed General Activity Index

Philly Fed 2016-08B

Image from the Philadelphia Fed August 2016 Manufacturing Business Outlook Survey. Blue highlights mine.

The report states: “The index for current manufacturing activity in the region rose 5 points to only 2.0 in August, as the share of firms reporting an increase in activity (35 percent) barely exceeded the share reporting a decrease (33 percent). This is only the third positive reading of the index in the current year.”

Peeking Under the Hood

Philly Fed 2016-08A

  • Current new orders index dropped from a reading of 11.8 in July to -7.2 in August. The percentage of firms reporting an increase in new orders (27 percent) was less than 1 point lower than last month; however, the percentage of firms reporting a decrease (34 percent) was 18 points higher than last month.
  • The current shipments index rose slightly, from 6.3 to 8.4. The percentage of firms reporting an increase in shipments (35 percent) was 6 points higher than last month.
  • The indexes for unfilled orders and delivery times fell into negative territory, recording values of -15.0 and -3.8, respectively. The index for inventories dropped from -4.3 to -9.2. The indicators for unfilled orders, delivery times, and inventories have been negative for most of this year.
  • The employment index fell 18 points to -20.0, which is its largest negative reading for the current year. Although 67 percent of the firms reported no change in employment this month, the percentage reporting decreases (25 percent) significantly exceeded the percentage reporting increases (5 percent).
  • The workweek index fell from -3.6 to -11.5. Twenty-five percent of the firms reported a decrease in average work hours, and only 13 percent reported an increase.

Econoday Comments

The Bloomberg Econoday writer was pretty much spot on for a change.

Once again the Philly Fed’s headline tells an entirely different story than the details. At plus 2.0, the headline may be a bit flat but that’s far better than orders or employment which are in deep contraction.

New orders fell back into negative ground, to minus 7.2 from July’s plus 11.8 for the very weakest reading of the year. Backlog orders fell to minus 15.0 from plus 1.9 which is also the weakest reading of the year. At a numbing minus 20.0, employment is down for an 8th month in a row for the weakest showing of the cycle, since July 2009. Inventories are in sharp contraction, the workweek is in sharp contraction, and delivery times are speeding up which is a sign of weakness. The one sign of strength (other than the headline) is shipments, at plus 8.4 in a gain that won’t likely be repeated anytime soon given the weakness in orders.

The headline for this report is not a composite but maybe it should be. If it were, it would be deeply negative.

Hints of Life vs. Hints of Nonthingness

Today’s comments are rater amusing in light of last month’s Econoday comments that spelled out “hints of life for a factory sector”.

My headline comment was entitled Philly Fed Disappointing; Hints of Nothingness.

Here’s the exact Econoday quote: “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.”

This was my rebuttal:

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?

Mish the Optimistic

Once again I was way too optimistic. Hints of Nothingness have suddenly become Hints of Extreme Negativity.

Mike “Mish” Shedlock