Philadelphia Fed Business Outlook Survey

The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district, which includes the tri-state area of Pennsylvania, New Jersey, and Delaware. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production.

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth so that it won’t lead to inflation. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is, and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior. Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation. The bond market is highly sensitive to this report because it is released early in the month and is available before other important indicators.

The survey is conducted in the vein of the Purchasing Managers Index (PMI) report; it questions voluntary participants about their outlook on things such as employment, new orders, shipments, inventories and prices paid. Answers are given in the form of “better”, “worse” or “same” as the previous month, and, as with the PMI, results are diffused into an index, only this index uses a median value for expansion of 0, rather than 50. The Philly Fed Report signals expansion when it is above zero and contraction when below. As a result, values can be negative month to month.

The survey has been conducted each month since May 1968, and is considered one of the most valuable regional purchasing manager indexes (There are currently almost 15 such regional reports, covering much of the U.S., albeit in piecemeal fashion).

As far as regional manufacturing reports go, the Philly Fed Report is one of the most watched, both for its early delivery to investors (released before the month is even over), and its blend of manufacturing sectors and businesses. The Philly Fed Report, along with the Chicago NAPM Index, have shown high correlations to the upcoming and hugely followed PMI report.

This index isn’t typically a big market mover (due to its small sample size and limited geographic range), but if a big surprise in terms of percentage change appears in the report, quick-thinking investors may anticipate similar changes to the PMI and make market moves accordingly.

The report is presented with solid commentary from the Reserve Bank itself, and often includes special survey questions that may be extremely timely if the economy is unsure of future growth possibilities.

The three states covered have a diverse mix of manufacturing sectors, from old line steel and coal to modern chemicals and semiconductors.

Data can be very volatile month to month due to sample size. Changes of more than 50% in a month are not uncommon.

The Philly Fed Report may be the most respected of all the regional purchasing manager reports. It should not be acted on in isolation, but it does represent a diverse area of the country, and has shown more than a 75% correlation to the upcoming PMI in studies. Therefore, it contains clues about the general market.