Philly Fed: Look Beyond the Headline

June 16th, 2016 10:46 am | by John Jansen |

Via Millan Mulraine at TDSecurities:

US: The Philly Fed Headline Index is Misleading

·         The Philly Fed index surprised pleasantly to the upside, with the headline index rising to 4.7 in June from -1.8.

·         On an ISM basis, however, the index weakened to 46.0 from 47.6.

·         The details of the report were quite weak, with souring in sentiment towards new orders, capital investment, employment and unfilled orders.

The Philly Fed index rebounded into expansionary territory in June, with the headline index rising to 4.7 from -1.8. This was well ahead of the market consensus for a more modest rise to 1.0. However, the details of the report were quite weak. On an ISM basis, the index actually declined, falling to 46.0 from 47.6.

The key forward-looking indicators all moved in the wrong direction, with sentiment on new orders (down from -1.9 to -3.0), employment (from -3.3 to -10.9), unfilled orders (down from -8.6 to 12.6) and inventories (down from 2.5 to -9.9) all weakening, while the hours worked sub-index remained firmly in contractionary territory in June. Capital expenditure intentions also weakened, falling to 4.0 from 23.6. Sentiment on business activity 6-month hence also weakened, falling to 29.8 from 36.1. The disconnect between the details and the headline number is due to the fact that the headline index is not a composite of the sub-indices (as is the case of the ISM index is), but the result of a separate survey question.

Looking beyond the headline number, which belies the weak undertone in the details of the report, the takeaway is simply that the US manufacturing sector is continuing to struggle, and the sharp deterioration in the forward-looking indicators is particularly noteworthy as they suggest that the foray in expansionary territory for the headline number will prove to be very brief.

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