US: Philadelphia Fed Business Outlook Survey

Thu May 17 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous
General Business Conditions Index - Level 21.0 18.5 to 26.0 34.4 23.2

A 45-year high for new orders tops a May Philly Fed report that is one of the strongest on record. The main index far surpassed Econoday's top estimate coming in at 34.4 for the strongest showing since May last year and one of the strongest of the 9-year expansion. New orders surged more than 22 points to 40.6 for the strongest showing since March 1973.

Signs of overheating are easy to find especially selling prices which jumped nearly 7 points to a very hot 36.4 and the highest reading since May 1981. Input prices slipped back slightly but remain extremely elevated at 52.6. Another sign of stress comes from delivery times which, at 18.5, are among the very highest in the report's 50 years of data. And the sample is hiring, at 30.2 which is up more than 3 points and the second highest on record.

If there were any concerns over tariffs these seem to be limited with the 6-month outlook at 38.7 which is down only 2 points in the month though it is down more than 9 points from March when steel and aluminum tariffs were first imposed.

The results from small sample surveys, such as the Philly Fed where a month's responses may total no more than 100, have to be taken cautiously. But there is little question that overheating is a risk for Philly's sample and by extension, perhaps, for the whole of the factory sector where order growth is nearing a 10 percent clip.

Market Consensus Before Announcement
The consensus forecast is 21.0 for May's Philly Fed which in April, belying the 23.2 headline, showed sharp slowing for both new orders and backlogs. But prior rates of order growth were very strong in this report; stresses on current production have been evident with both delivery delays and the workweek near 50-year records and both input and selling prices at expansion highs.

The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production.

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets. 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.