The Philly Fed's Business Outlook

Economic data is not a favorite of the investing public - I understand - but I happen to enjoy it and it provides very insightful pieces for the overall economic picture. One of my favorite to look into is in Philadelphia, which is one of the major trading hubs in the United States. If you haven't had the pleasure of checking out this very vital resource, you should check it out:

What IS the Philadelphia (Philly) Fed Business Outlook?

From Trading Economics, the Philadelphia Fed Manufacturing Index is based on The Business Outlook Survey of manufacturers in the Third Federal Reserve District. Participants report the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received. The index above 0 indicates factory-sector growth, below 0 contraction.

Why Should Investors Care?

According to Bloomberg, 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.

What Does the Index Currently Tell Us?

This month was one of the better ones in the past year, though it is still a long way off from reaching the noteworthy highs of the post-recession. However, even though the headline reading is at 2.0, it is far worse than the important components that are in deep contraction. New orders are deeply negative at -7.2 in August from July's +11.8 for the very weakest reading of the year. Orders (on the backlog side) declined to -15.0 from +1.9 which is also the weakest reading of the year. At a numbing -20.0, employment is down for an 8th consecutive month for the weakest showing of the cycle, since July 2009. Yikes.

Inventories are in sharp contraction, the workweek is in sharp contraction, and delivery times are speeding up which is a sign of weakness. The one sign of strength (other than the headline) is shipments, at +8.4 in a gain that won't likely be repeated anytime soon given the weakness in orders.The headline for this report is not a composite but maybe it should be because if that were the case, it would be deeply negative.

Well, darn, Philly.

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