Philly Fed Bounces - Internals Weaken
This morning's release of the Philadelphia Fed survey showed a jump at the headline from -1.9 in September to 5.7 in October. On the surface this is good news as it reflects a manufacturing region that is growing versus contracting. The chart below shows the Philly Fed Survey overlaid with a 6-month moving average. The month to month survey numbers have historically been very volatile so smoothing it with the moving average gives us a better view of the overall trend of the data.
As shown there have only been two times in the history of the index when the 6-month moving average of the survey was below zero and the economy was not in, or about to be in, a recession. The 2011 recovery, as we have discussed previously, was driven by artificial intervention by the Fed and the ECB, a manufacturing restart from the Japanese earthquake and tsunami, a drop in oil and energy prices and an unseasonably warm winter. Outside of the Fed's current bond buying program the other supports that buoyed the economy in 2011 are not present today.
Unfortunately, the headline is where the good news stopped. The underlying components deteriorated in the most economically important areas. New Orders declined from 1 to -0.6 in October while Delivery Times plummeted from -8.4 to -15.9. While there has been much debate over the recent drop in unemployment - the employment component in the Philly Fed Survey plunged from -7.3 in September to -10.7 in October for the lowest reading since September of 2009.
Net Prices, which is the difference between Prices Paid and Prices Received, remains weak which continues to impact corporate profit margins. We have written about this in the past and are now witnessing it real time as warnings and earnings announcements from companies such as IBM, INTC, CAT, NSC, FDX, KO, and others show declining revenues and lower margins. In the month of October the 6-month average of net prices improved only marginally to 7.65 from 7.57 in September and remains near historic lows. As opposed to many Wall Street analysts estimates - the weakness in corporate earnings may be more long lasting as long as spreads between what is paid out and received remain this tight.
However, the real concerns lay in the future outlooks. Across the board the outlook for future activity declined.
- Future Activity Index declined from 41.2 in September to 21.2 in October
- Future New Orders dropped from 49.4 to 21.2
- Future Shipments plunged from 42.9 to 20.6
- Future Unfilled Orders slipped from 13.8 to 10.7
- Future Delivery Times slowed from 6.8 to -0.3
- Future Inventories rose, which is unwanted, from -4.7 to 0.5
- Future Prices Paid, also unwanted, rose from 38 to 49.1
- Future Prices Received declined from 27.2 to 14.9
- Future Employment plummeted from 21.4 to 8
- Future Avg. Work Week was cut from 14.6 to 11.1
- Financial Capital Expenditures, important to GDP, declined from 4.8 to -1.9
The declines in the future expectations components don't provide much hope for a sustainable upturn in index in the months ahead. The pickup in inventories, in both the current index and future expectations, are unwanted as declines in new orders are leading to a drop in the need for more employment.
The current Presidential candidates should be paying close heed to what this report is saying. Both candidates want to create jobs but the discussions about taxes and regulations, while important for long term economic growth, does not solve the immediate problem of end demand. The drops in new orders, rises in inventories, slowdowns in delivery times and negative levels of unfilled orders is putting businesses on the defensive. This translates into, as shown, less employment and more focus on cost cutting to protect profit margins.
Unfortunately, Bernanke's bond buying program and the current Administration's focus on "taxing the rich" does not address the issues that are keeping unemployment high and demand low. The recession in the Eurozone, and the slowdown in China, is also impacting the economy as exports come under attack.
With each passing report more indicators are signaling that the economy is running out of gas. While we are not "technically" in a recession as of yet the risks are definitely on the rise. For the first time since the Fed started launching QE programs to stimulate economic growth - this is the first time that such a program will have to offset a globally weakening economy, declining earnings and weaker corporate outlooks. The question as to whether such programs can truly impact the economy is likely to be answered soon.