Premature Celebration Of Philly Fed Data

Over the past 6 months there has been a steady drumbeat of ever stronger economic data from multiple sources, domestic and foreign. This weeks report of the Philadelphia Federal Reserve Manufacturing Survey attained a whole new level of impressive and conjures hope for ‘Yuge’ economic expansion. While the monthly readings can be very erratic, we have to turn back the clock to the halcyon high growth 1980’s to equal the current robust conditions – “in Philadelphia”. When the other Fed districts report such record growth then there would be no doubt that robust GDP growth rates will follow. However, before we accept Trumpian forecasts of 4 to 6% growth, that most economists assume is chimerical given our demographics and budgetary restraints, we need to see corroboration of record growth from other sources. This extraordinarily strong Philly Fed number is likely exaggerated in its relevance, but continues to highlight a new phase of real and forecasted growth.

Some validity in the Philly Fed report comes from strong expectations and actual data in the recent Empire State survey. Looking at the most impressive component of the New York regional business survey, we see backlogs jumping to 5 year highs after years of contraction. Rapid demand growth is lengthening delivery times to multi-year highs and depleted inventories are just beginning to rebuild.

In the 1970’s and ’80’s monthly Philly Fed readings rising above 40 coincided with impressive economic growth. It would be exciting to witness such quarterly eruptions in our GDP once again, but highly unlikely given the aging workforce and high debt to GDP levels. While it has been 20+ years since we have seen comparable readings, lesser surges in the Philly Fed in recent years imply more subdued GDP rates coincident with this data.

What would be impressive and increase the odds for a Trumpian growth of 4 to 6% for a short period would be for other Fed District growth numbers to also reach new records along with the important Purchasing Managers Index (PMI) touching 60. It’s encouraging that the PMI New Orders component remains above 60 for the past 2 months, but it has been 13 years since the composite PMI exceeded the optimistic 60 level.

Our forecast in 2015 had been for an end to the energy recession by early 2016 followed by modest overall growth that should accelerate in 2017-2018. Recent data continues to support this outlook and the current condition of manufacturing backlogs, inventories and new orders add to the expectation for faster and more sustained growth. Should the PMI rise above 60 it may mark the first sign of a full recovery since the economy bottomed in 2009. The current euphoric Philly Fed growth however is not that sign, so stay tuned for more sources of growth  before raising the “All Clear” flag. Philly Fed Index at 43 is just a number, but we have been showing quite a few metrics since Trump was elected that are more in alignment with the “start” of an economic expansion as opposed to the late innings. Food for thought.


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