How’s that for a headline. An economic indicator actually came in better than expected! Today’s Philly Fed Manufacturing report for the month of January came in at a level of -3.5 on the headline number, which was modestly better than the consensus forecast of -5.9. For a report that is typically pretty volatile, the margin of the beat was probably nothing more than a rounding error, but at this point we will take what we can get.
Although the headline reading was better than expected, it was still negative for the fifth straight month. Likewise, the internals of this month’s report were also negative with shipments being the only one of nine components showing growth (positive number in the table). In terms of breadth, though, five out of nine components increased on a m/m basis, so that’s a silver lining. The biggest improvements this month came in Shipments and Unfilled Orders while the largest decline was in Inventories.
As with most economic indicators lately, investors are looking at current readings and how they compare to recessionary and pre-recessionary readings. As shown in the upper chart, the negative levels we have seen in the Philly Fed report so far are nowhere near levels that we have seen during recessions, and there have been plenty of periods where the Philly Fed dropped to lower levels and a recession did not ensue.
Another way to look at this is to compare the monthly breadth of the Philly Fed report over a rolling 12 month period. To do this, we take the net number of components in the Philly Fed report rising and falling on a m/m basis each month. Following this month’s data, the 12-month average increased from -1.75 up to -0.75 and up from its recent low of -2.08. Looking back over time, the record of this breadth reading in predicting a recession is mixed as well. While it was depressed during the prior four recessions, it also dropped down to similar levels in the mid-1980s, the mid-1990s, the mid-2000s, and back in early 2012. In each of those periods, the economy managed to skirt a recession