The Philly Fed saw a slight improvement this month in the numbers which is most likely due to basic inventory restocking needs after two severe down months across the majority of the regions surveyed by the Fed. The index ticked up to a modest 8.7 which follows two very negative previous months of minus 17.5 in September and minus 30.7 for the troubled month of August.
There was Improvement this month in new orders, at plus 7.8, and in shipments, at plus 13.6. Again, while this is likely a temporary bounce in an otherwise weak index it did slow the run of monthly contractions in backlogs with a plus 3.4. Employment, however, showed a sharp contraction from the previous months 5.8 read to just 1.4 which is more indicative of the fact this may be just a temporary bounce in the overall index. Furthermore, there was a third straight decline in delivery times which points to overcapacity in the shipping sector and hints at economic weakness. Weakness in end demand is also showing up in drawdowns of inventory and price pressures.
While this month did bring a nice relief to the last few months of decline it doesn’t necessarily mean that the economy is out of danger. As shown in the chart the 6-month trend is still very negative and in a place where recessions normally occur. Also, while todays read of 8.7 is certainly nice the survey in September (+5.6), October (+6.7) and November (+6.2) of 2007 certainly didn’t warn of the impending recession at that time. The same occurred in September (+5.5), October (+1.8) and November (+6.8) in 2000 just before the massive decline into the recession then. See a pattern there?
The Leading Economic Indicator Index, which bounced a very slight 0.2 percent today, continues to point to economic weakness on a 6-month change basis. Today’s report was relatively weak with the exception of those items that were directly or indirectly controlled by the Fed and their loose monetary policy which continues to artificially boost the index.
The latest increase was led by the rate differential between the 10-year T-note and fed funds which contributed 0.2% points. Positives were also seen in money supply which was due to the flight to safety out of equities and into cash in the stock market. Negatives were led by a dip in housing permits, which will show up again in the next report, and downward movement in new orders for nondefense capital goods, stock prices, and initial jobless claims.
The year-over-year change in the index is coming off of peaks and while not in negative territory yet, which can occur in very quickly, be mindful of the trend rather than the number. As you can see in the chart a one or two month bounce in the index doesn’t give us an all clear sign for the economy. Furthermore you rarely see the index turn up once a decline has started before it drops below the zero line and only twice since 1959 has the indicator dropped below zero with being in a recession.
We will continue to monitor the data as it comes in, however, at this point the data still points to further weakness in the economy without further Fed intervention. Any upset in Europe or continued softness in China could well push the U.S. into further decline.