Philly Fed survey points to manufacturing rebound

The Federal Reserve Bank of Philadelphia released its monthly Business Outlook Survey for August 2009. The numbers showed that the manufacturing sector in the region is in recovery mode right now, with the survey recording its highest level since November 2007, the last month before the recession began.

The region’s manufacturing sector is showing some signs of stabilizing, according to firms polled for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered slightly positive readings this month. Although firms reported continued declines in employment and work hours this month, losses were not as widespread. Most of the survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives expect business activity to increase over the next six months.

Current Indicators Suggest Improvement

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -7.5 in July to 4.2 this month. This is the highest reading of the index since November 2007 (see Chart). The percentage of firms reporting increases in activity (27 percent) was slightly higher than the percentage reporting decreases (23 percent). Other broad indicators also suggested improvement. The current new orders index edged six points higher, from -2.2 to 4.2, also its highest reading since November 2007. The current shipments index increased 10 points, to a slightly positive reading.

Labor market conditions remain weak. Firms continue to report declines in employment and work hours, but overall job losses were not as large this month. The current employment index increased from a weak reading of -25.3 to -12.9, its highest level in 11 months. Twenty-three percent of firms reported declines in employment this month, down from 30 percent in the previous month. Although the workweek index remained negative, the index increased nine points, to -6.3.

The weak link again is employment.  As I mentioned earlier in the week, I expect manufacturing to lead out of recovery with employment a weak link in the recovery story. And this survey is yet another indication of this dichotomy.