The Philadelphia Fed Business Outlook Survey of manufacturing activity has been in positive territory for eight months. New orders are up, unfilled orders are up, Employment is up, and work hours are up.

Current Indicators Suggest Expansion Continues The index for current manufacturing activity in the region decreased from a reading of 43.3 in February to 32.8 this month. The index has been positive for eight consecutive months and remains at a relatively high reading (see Chart 1). Forty-four percent of the firms indicated increases in activity in March, while 11 percent reported decreases. The current new orders and shipments indexes increased, rising 1 point and 4 points, respectively. Both the delivery times and unfilled orders indexes were positive for the fifth consecutive month, suggesting longer delivery times and an increase in unfilled orders. Firms reported an increase in manufacturing employment and work hours this month. The percentage of firms reporting an increase in employment (25 percent) exceeded the percentage reporting a decrease (8 percent). The current employment index improved 6 points, its fourth consecutive positive reading. Firms also reported an increase in work hours this month: The average workweek index, which increased 5 points, has been positive for five consecutive months.

Prices Paid vs Prices Received

Despite the apparent strength, manufacturers have not been able to raise prices as frequently as their input prices have risen.

Econoday Comments

Bloomberg Econoday was glowing over the Philly Fed report.

Robust is a modest description of activity right now in the Mid-Atlantic manufacturing sector, at least based on the Philly Fed index which came in at 32.8 and above Econoday expectations for 30.0. New orders continue to pour in, up 6 tenths this month to 38.6 for the strongest month since November 1983. Orders have been accelerating for the last 6 months and are filling up backlog orders which, up nearly 4 points in the month to 14.4, are at their highest level since February 1993.

Production is in full force with the workweek at 18.5 which is the highest for this reading since February 2004. At 32.9, shipments are the highest they’ve been since July 2004. Inventories are needed and are building and delivery times are slowing in what hints at congestion in the supply chain, congestion that is likely contributing to price pressures. Cost inputs are at 40.7, which was last exceeded in May 2011, and selling prices are at 20.6 which outside of January’s 26.8 are also the highest since May 2011.

All this is very positive for employment of course which is up more than 6 points to 17.5 for the best rate of hiring since November 2014. This report, followed by Empire State, have been signaling breakout acceleration for the nation’s factory sector. A breakout, however, that has yet to be confirmed by definitive economic data out of Washington.

Empire State Survey

Most of the regional Fed manufacturing reports look similar. Here is the Empire State Manufacturing Survey.

Factory Orders

Factory orders, excluding aircraft, have not been robust. On March 6, I commented Factory Order Details Disappoint Again.

The usually optimistic Bloomberg Econoday writer commented:

Strength in aircraft orders is masking what is not a favorable factory orders report where the January headline rose a nearly as-expected 1.2 percent. When excluding transportation equipment, orders rose only 0.3 percent. And when looking at core capital goods (nondefense ex-aircraft) the results turn decidedly weak, at a 0.1 percent decline for orders which points to softness ahead for related shipments. And shipments were already in contraction in January, falling 0.4 percent.

There is no revision to December’s headline though there is one for unfilled orders which are pushed down another tenth to a very steep minus 0.8 percent. In January, unfilled orders fell 0.4 percent for the 7th decline in 8 months in the worst streak of the economic cycle. This is not a good sign for factory employment.

Industrial Production

The Fed Industrial Production Report for January, released February 15, shows a decline in industrial production.

I commented Industrial Production “Unexpectedly” Declines Due to Weather: Economists Surprised Again, GDPNow Forecast Dives.

But annual revisions are coming up: “The Federal Reserve Board plans to issue its annual revision to the index of industrial production (IP) and the related measures of capacity utilization on March 31, 2017.”

Why Doesn’t Factory Data Match?

  1. Perhaps the Fed will revise factory data higher.
  2. Perhaps strength in the regional reports simply has not shown up yet.
  3. Perhaps diffusion indexes are a poor way of estimating strength.

In regards to point number three, diffusion indexes can be a strange animal. New orders picking up by 1% at two small firms but down 15% at a larger firm is a net +1 to the index.

Diffusion indexes just measure direction, not strength of the move.

If manufacturing conditions are generally improving, yet barely improving, we would see reports like the Philly Fed and Empire State survey above, with actual factory data not matching.

Mike “Mish” Shedlock