I hope that RealityChek regulars remember my posts debunking the idea that a widely followed private sector gauge of manufacturing’s health has much to do with manufacturing’s health. As I explained, the Institute for Supply Management’s (ISM) monthly surveys of American industry suffer badly from “survivorship bias.”
In other words, they may accurately report on the performance of the nation’s manufacturing base at that moment. But because they only question companies still in existence in a given month, they provide no information on how that base has changed over time, and especially on the vital question of whether the base has shrunk or grown. As a result, I was able to show that in recent decades, the ISM’s findings that domestic manufacturing is in “expansion” mode have usually – and increasingly – clashed with the (more comprehensive) government data.
At the same time, the ISM is far from the only survey-based report on manufacturing that’s closely followed by students of the economy and of industry – including investors. Many of the Federal Reserve’s regional banks analyze manufacturing in their geographic districts in the same way, and one such series that often makes headlines comes from the Philadelphia Federal Reserve. I just looked over its latest release – from this morning – and it was so completely weird that I checked to see whether its findings have matched up or not with government statistics on manufacturing’s growth in the area it covers. And guess what? Its results could well be as off base as the ISM’s.
What set me off was the Philly Fed’s finding that manufacturing in its district – which includes the eastern three-fourths of Pennsylvania (pretty much everything up to Pittsburgh), southern New Jersey, and Delaware – had moved back into expansion mode in July. Nothing strange per se about that. What was utterly bizarre was the contention that this improvement took place even though new orders for this same manufacturing complex plunged deep into contraction territory, and the employment indicators performed almost as badly.
These aren’t the only measures tracked by Philly Fed economists (and their counterparts at other regional Fed banks), and much more positive readings for other indicators pushed the overall headline figure – which is a composite of all the data – into the black for July. But let’s leave aside whatever narrow technical issues this methodology raises and grant the Philly Fed’s view that such a mix represents “expansion” or “growth.” Let’s also leave aside the reliance of the ISM and Philly Fed and the like on manufacturers’ judgments on how their companies are performing – rather than on their actual performance.
That still leaves us with the question of how well this definition of expansion or growth tracks with U.S. government data on the actual production achieved by manufacturing in the district over time. These strike me at least as better measures since they focus (however imperfectly) on what’s measurably come out of a factory. And of course, without adequate output, higher profile gauges of manufacturing’s health, like employment, can’t possibly be expected to be satisfactory (Unless you’re OK with productivity stagnating – which seems to be the case recently.)
There are no output numbers for the Philly Fed’s district as such. But you can get a pretty good idea of the situation by looking up the manufacturing production statistics for the major towns and cities it contains, which are kept by the U.S. Commerce Department. At this level of specificity, such data only go up to 2014. But the contrast between them during the current economic recovery (which began in 2009), and the Philly Fed headlines over the 2009-20014 period, is striking.
Here’s a chart from the Philly Fed that shows those headlines:
As you can see, the brown “current activity” line doesn’t indicate terrific performance. But it stayed over zero (i.e., in expansion) for most of the relevant five years.
The Commerce Department keeps statistics on manufacturing production pre- and post-inflation for 18 of the “metropolitan areas” in the Philly Fed district. I looked at the former, since it yields the best sense of volumes, and therefore of the level of activity. And these figures show that manufacturing production rose in nine of them. Score one for the Philly Fed? If you’re generous.
But there are still two big problems. First, two of those increases, in tiny Gettysburg and Bloomsburg-Berwick, were minimal – i.e., much less than one half of one percent. In bigger Lancaster, manufacturing production expanded by a total of 2.10 percent in real terms. Harrisburg-Carlisle, in the middle, size-wise, between those two areas, fared better, with 3.95 percent after-inflation manufacturing growth. But these increases look pretty paltry over a five-year stretch.
By far the best performance in the Philly Fed’s district was turned in by the Trenton, New Jersey area, where constant dollar manufacturing output soared by more than 54 percent between 2009 and 2014. But its manufacturing sector is still peanuts, relatively speaking. Moreover, the real manufacturing declines that show up in the Commerce data were much bigger on average than the increases.
The second big problem is that there’s no adequate data – either pre- or post-inflation – for the Philadelphia-Camden (New Jersey)-Wilmington (Delaware) metropolitan area, which is by far the biggest in the Philly Fed district. Nonetheless, the few numbers that are provided suggest that its manufacturing sector has fallen on hard times. Specifically, between 2008 and 2012 (the only post-2005 numbers available), its manufacturing production shrank by 18.63 percent adjusting for inflation.
So it seems fair to conclude that, if you’re looking for a reasonably accurate portrait of those domestic American manufacturers who are still standing after decades of offshoring-happy trade policies, other officially created challenges, the economy’s inevitable ups and downs, and frequently changing product markets and technologies, by all means rely on the monthly ISM and the regional Fed surveys. If you’re interested in knowing about manufacturing recently aside from these survivors – including about whether their ranks have grown or shrunk – you’ll need to look someplace else.