Thursday, October 16, 2008

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey October 2008

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for October showing a dramatic resumption of deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at -37.5.

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 significantly now twice by the “current” index which now stands at -37.5 while the “future” index stands at -4.2.

The latest results also currently display a significantly 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 that current orders, future employment and current prices paid are all now trending down.

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.