Thursday, January 15, 2009

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey January 2009

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for January showing a continued deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at –24.3.

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 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 the charts below, and now having been officially confirmed by the NBER, the business outlook survey again very accurately predicted the start of the current recession and further continues to indicate contraction.

Also, today’s results now certainty show that any recent parallel to the stagflationary eras of the 70s and early 80 have given way to a stronger stag-deflationary force bringing down prices, new orders and employment simultaneously.

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.