A Tale of Two Surveys

By Francis P. Rybinski, CFA, Chief Macro Strategist & D. Harris Kere, CFA, Investment Strategist

There is an interesting discrepancy in the Philly Fed Index. Here's a quick breakdown of what we found:

What is it?

The Philly Fed Index is the results of a survey of roughly 250 companies with over 100 employees from the Third Federal Reserve District. This is basically a subcomponent of the ISM Manufacturing Index, which is based on survey results from 400 purchasing managers nationwide. Also, as the regional Fed surveys (like the Philly Fed) are released during the second half of the month, they are often thought of as a potential lead indicator to the upcoming ISM Manufacturing Index which is released on the first of every month.

What's the Issue?

The inconsistency stems from the fact that the headline number was up roughly five points, yet all the key subcomponents fell—some by a dramatic amount (Exhibit 1).

How can this be?

Now you're going to see how the sausage is made...

ISM Manufacturing Index: The headline index number is a weighted average of the five key subcomponents—new orders, production, shipments, inventories, and employment—each with 20% weighting.

Philly Fed Index: The headline number is a separate question from the subcomponents. Therefore, it is possible to have no correlation at times to underlying trends.

If the Philly Fed was calculated like the ISM, it would have posted a decent drop in November, not a five point increase. Furthermore, the softening in the Philly Fed Index subcomponents is much more comparable to what was observed in the November Empire State Manufacturing Index release last week.

Key Takeaway: On a macro level, the headline moving higher could be reflective of an overall feeling of optimism regarding the direction of trade tensions and the possible 'Phase one' trade deal between the US and China, while the underlying is more reflective of their respective business. (Note, survey is reflective of questionnaires received by Monday, November 18).

Exhibit 1: Summary of Philadelphia area manufacturing activity from the Federal Reserve Bank of Philadelphia

Diffusion Index Nov. 2019 Oct. 2019 Sept. 2019 Aug. 2019 July 2019 June 2019 May 2019 6-mo Avg Nov. vs. 6m Avg Aegon's Comments

General Bus. Act. 10.4 5.6 12.0 16.8 21.8 0.3 16.6 11.2 -0.8 Solid headline growth...but inconsistent with underlying survey responses.
One Month Chg 4.8 -6.4 -4.8 -5.0 21.5 -16.3 n/a n/a    
Prices Paid 7.8 16.8 33 12.8 16.1 12.9 23.1 16.6 -8.8 Deflationary
Prices Received 12.2 16.4 20.8 13.0 9.5 .06 17.5 12.1 .01  
New Orders 8.4 26.2 24.8 25.8 18.9 8.3 11.0 18.7 -10.3 Future production indicator
Shipments 9.8 18.9 26.4 19.0 24.9 16.6 27.6 19.3 -9.5 Current GDP indicator
Unfilled Orders 6.0 18.8 17.6 9.1 3.7 10.2 1.9 10.9 -4.9  
Delivery Time 8.5 8.0 11.6 9.3 15.0 15.6 3.4 11.3 -2.8  
Inventories -4.6 6.6 21.8 8.7 8.1 2.4 -3.1 7.2 -11.8 Needed drawdown after recent inventory accumulation
# of Employees 21.5 32.9 15.8 3.6 30.0 15.4 18.2 19.9 1.6 Consistent with moderating labor growth
Avg Workweek 5.2 10.8 13 6.8 23 7.3 10.9  11.0  -5.8 Consistent with Aggregate Hours softening.

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