Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for September showing a strengthening of the regions manufacturing sector with the current activity index indicating tepid growth at 3.8, after many months of consecutive negative monthly results.The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.
As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the “current” diffusion index (more on diffusion indices later) generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.
Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.
As you can see from recent results, -20 had been breached by the “current” index which now stands at 3.8 while the “future” index stands at 30.8.The latest results also display a potential, albeit less significant, parallel to the stagflationary eras of the 70s and early 80s.
The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).
Notice that while current orders and future employment are trending down, current prices paid have trended up but in recent months this pattern look less significant.Generally though, these three indicators should move, more or less, together.
The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.
