Manufacturing Optimists Need a Reality Check

Mish Shedlock |

The_Secret.jpgExpectations of Six Months Ago vs. Today's Reality

On Thursday, I noted Bloomberg stated: 

There may very well be something wrong with the manufacturing sector, at least in the Northeast where the Empire State index has been in deep negative ground for the last two months followed now by a minus 6.0 headline for the Philly Fed index." 

With that comment, let's dig deeper into the latest Philadelphia Fed Business Outlook Survey.

Here is a chart that shows current conditions compared to manufacturer's expectations six month's from now:

Current vs. Future Activity

Current and Future General Activity Indexes_1.jpg

The Future is Bright?

The Philadelphia Fed reported ... 

 Future Indexes Remained Generally Optimistic

The survey’s broadest indicator of future growth edged slightly higher this month. The future general activity index increased 1 point, to 44.0, its highest reading since January. The future index for new orders, at 44.4, decreased 2 points, while the future shipments index, at 41.4, increased 4 points. Furthermore, 28 percent of the firms expect expansion in their workforce over the next six months, while 10 percent expect a reduction."

Future Expectations vs. Reality

To check the usefulness of these future projections, I downloaded the data, then shifted the look-ahead projections by six months and plotted those forecasts vs. current conditions: 

Philadelphia Fed Manufacturing_1.jpg

The above chart shows what manufacturers expected six months ago vs. what actually happened. A major portion of the time, look-ahead sentiment vs. reality are inversely correlated. Note in particular, the sharp rise in expectations vs. the actual sharp decline (third purple box) that started in November or December of 2014.

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