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Thursday, April 21, 2011

Correct Reporting and the Philly Fed Manufacturing Index

by Calculated Risk on 4/21/2011 06:12:00 PM

When the Philly Fed business outlook report was released this morning, I made several points:
• The index showed slower expansion in April than in March.
• This was below expectations, but ...
• This index showed decent growth in April, and this suggests the ISM index will be in the low 60s for April.

Several readers have sent me other reports arguing the Philly Fed report suggests, well, the end of the world or something. That is wrong.

First, the Philly Fed index is noisy month-to-month.

Second, the reading of 18.5 is above the median during expansions for the last 40 years. The median during expansions is 14.

Third, the reading in March was the highest since January 1984 - and a decline was expected (although this reading was below expectations).

Here is a long term graph of the index:

Philly Fed Click on graph for larger image.

Obviously this index is noisy, and this is just one month. Still a reading of 18.5 shows decent expansion, not the end of the world as we know it.

Because this index is noisy, I average it with the NY Fed (Empire state) each month. Remember the NY Fed index showed faster expansion in April, and was at the highest level in a year.

Then I average both the Philly Fed and NY Fed indexes with several other regional surveys - and that helps predict the ISM manufacturing index.

ISM PMI This graph compares the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through April. The ISM and total Fed surveys are through March.

And what does a 60 reading for the ISM mean? Here is a long term graph of the ISM manufacturing index:

ISM PMI The dashed line is for the March ISM PMI of 61.2% (very strong).

Clearly a reading in the low 60s (or even high 50s) shows pretty decent expansion for manufacturing.

One reader told me he was surprised by the negativity. He wrote: "We're finally seeing signs of real growth here. Kinda sad in a way. I was getting comfortable coming in late and still finding a parking spot close to the door." Too bad - my guess he is going to have to get in a little earlier, or walk a little further!