The Philadelphia Federal Reserve Bank’s Business Outlook Survey is a regional business condition survey put out monthly by the bank’s Research Department. This survey is used to create a manufacturing activity index and is based on questions given to manufacturers in the Pennsylvania, New Jersey, and Delaware region. The results are based on a diffusion index where the neutral value is zero. Index values greater than zero indicate growth, while negative values indicate contraction of manufacturing conditions within the Philadelphia Federal Reserve district.
In September, the index picked up considerably from the prior month, up to 22.3 from just 9.3 in August. This is the highest reading since March of 2011, and reflects the fact that 36 percent of firms reported increased business activity in August, while just 14 percent reported a decline. Other indices also showed growth in the Philadelphia region, with the index components for new orders, shipments and unfilled orders all increasing. Happily, labor market indicators also showed improvement, with the employment index (at 10.3) reaching its highest level since April of 2012. Future expectations indices also increased at strong rates.
The growth in the Philadelphia region’s manufacturing sector reflects on overall strong manufacturing and productivity growth in the US economy since the recession, and does suggest that earlier weakness in 2013 may be dissipating. That said, the Philadelphia Fed’s index also showed signs of higher prices for inputs which while not a direct indicator of future inflation trends, is among a number of recent statistics pointing toward higher prices. This reflects the story that all of this week’s indicators are showing. The overall US economy appears to be going through a normal – though depressed – business cycle. Following the 2008 recession, the economy has grown consistently for about 4 years now. This suggests that the cycle is beginning to reach its peak, and if history is a guide, within three or four years, the economy will be going through another normal recessionary cycle.
With growth being so slow, and the last recession so large, it is unlikely that employment, income or many key economic variables will reach their pre-recession peaks prior to the next recession. This does not bode well for the economy over the long term. This pessimistic forecast is keeping businesses in Philadelphia and throughout the country cautious about making new investments, or quickly ramping up hiring.