- Importance (A-F): The Philadelphia Fed Index merits a B.
- Source: The Philadelphia Federal Reserve bank.
- Release Time: Third Thursday of the month at 10 ET for the current
There are many regional manufacturing surveys, and they tend to be ranked in
order of timeliness and the importance of the region. The Philadelphia Fed's
survey is first each month, actually coming out during the third week of the
month for which it is reporting. Several smaller surveys are then released
before the Chicago purchasing managers' report on the last day of each month. A
few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM
and are of little value. The purchasing managers' reports are measured like the
national NAPM - 50% marks the breakeven line between an expanding and
contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices,
0 is the breakeven mark.
These surveys can be of some help in forecasting the national NAPM -
particularly the Philadelphia and Chicago surveys which are more closely watched
due to their timeliness and the fact that these regions represent a reasonable
cross section of national manufacturing activities.
The market has been bombarded with a bevy of surveys purporting to measure
manufacturing activity in every nook and cranny of the country. First it was
Philadelphia, then Chicago, and Detroit, Milwaukee, New York, Cincinnati,
Richmond, Atlanta, Boston, and there might as well have been a Nome survey. This
hodge-podge of releases is begging for someone - namely us - to come along and
cut this group down to a more manageable size, say....two. And the winners
Nuts and Bolts
Not so fast. We need a build-up before we cut to the proverbial chase. Let's
start with the issue of what these manufacturing surveys are trying to measure
and how they go about doing it. The leader of this pack of regional surveys is
the NAPM - National Association of Purchasing Managers - index. It has been
around since 1931 (1948 on an uninterrupted basis), it is national, and it is
one of the most timely measures of manufacturing activity available. In other
words, it sets the standards by which its progeny are measured.
The NAPM index is actually a composite of five sub-indices - new orders,
production, supplier deliveries, inventories, and employment. In surveying over
300 companies each month, the NAPM asks for positive, negative, or unchanged
readings on each of these indicators. The positive responses are added to one
half of the unchanged responses to produce the diffusion index. For example, if
50% of respondents reported stronger orders, 40% reported weaker, and 10%
unchanged, the diffusion index for orders would be 55%, the 50% positive plus
half of the 10% unchanged. To calculate the total index, the NAPM uses weights
for the five indicators, which are as follows: 30% new orders, 25% production,
20% employment, 15% supplier deliveries, and 10% inventories.
The Selection Criteria
Since this methodology has made the NAPM index one of the better leading
indicators of economic activity over the years, we will measure the usefulness
of the regional indices based on their ability to help in forecasting the
national index. In our effort to arrive at the two most important regional
index, these criteria make eliminating most of the candidates easy for one
simple reason - they are released after the national index. While
regional economic developments are of interest to those who live in the region,
they are not particularly important to the Treasury market. If a region cannot
help in forecasting national trends, then its data are not particularly useful.
So say adios to Atlanta, Richmond, Kansas City, and who knows how many others
which have cropped up in recent years.
And the Winners Are...
Let's focus on the regional surveys which precede the release of the national
index on the first business day of each month (with data for the prior month).
The contestants are Philadelphia, Chicago, Milwaukee, Detroit, New York, and the
most recent addition to the bunch - the APICS survey. We looked at the
correlation of all of these indices to the national NAPM and found substantial
differences in their forecasting ability. The winners are...drum roll
please...Chicago and Philadelphia, in that order.
The Chicago NAPM index, which is released on the last business day of the
month (with data for the same month), has an impressive 91% correlation with the
national NAPM. The Philadelphia Fed index, which is released on the third
Thursday of the month (with data for the same month), was a distant second at
76%. Philly Fed's performance improved slightly to 78% when Briefing measured
its results using the NAPM methodology. The Philly index as released is not a
composite of its subindices, as the NAPM is. Instead, the Philly Fed survey asks
many questions, but the total index is based on the general question "are
business conditions better or worse than last month." It is often the case that
a weighted measure of the individual questions on specifics such as new orders
and production moves in a different direction than the index based on the
The rest of the regional indices fared poorly, ranging from correlations as
poor as 55% (APICS) to 73% (Milwaukee). Chicago was the clear winner, but the
Philly Fed index definitely deserves recognition, particularly since it is
released so much earlier than the rest. In the future, then, we would recommend
setting aside most of the regional manufacturing surveys and focussing on just
Philly and Chicago, which offer the best hope of predicting the national index.
And when you look at the Philly index, improve your chances by looking at the
Philly numbers calculated on an NAPM basis, which Briefing will be happy to