The last few months have provided a timely reminder that maybe some of the leading gauges of U.S.-based manufacturing’s strengths shouldn’t play such a leading role. Or at least maybe they shouldn’t if you believe (as you should) that reports that try to measure actual changes in economic indicators in various parts of the economy are more important than reports that try to measure how companies in those parts of the economy say that they’re faring.
In this case, I’m talking about the differences between the results of the Federal Reserve’s monthly industrial production index (an actual change report), and those of two series of monthly soundings on the status of their region’s manufacturing done by the New York and Philadelphia branches of the Federal Reserve system (which are “sentiment” surveys).
Although the manufacturing data contained in the industrial production index show that domestic industry has now moved past a brief production downturn in late spring, and has been growing solidly since, you wouldn’t know it from the two regional Fed results. Even stranger, the New York Fed survey results didn’t correspond with very well with the previous months’ actual manufacturing output numbers, either.
Specifically, the Fed’s industrial production index reported that the nation’s manufacturing output adjusted for inflation rose by 0.46 percent in April, but then dropped by 0.39 percent in May and 0.58 percent in June.
Manufacturers in the New York area assessed their current business conditions in April as positive by an impressive 24.6 score. Their views darkened significantly in May (down to -11.6), as manufacturing production nationally fell. But in June, when the U.S.-based manufacturers output fell even faster, New York manufacturers’ sentiment improved almost back to a neutral zero score.
Their counterparts in the Philadelphia matched up better with the national results. They were nearly as positive as the New Yorkers about business in April, as domestic manufacturing as a whole grew (producing a score of +17.6), and became more negative during contractionary May (with their score falling to a barely positive +2.6). But unlike the New Yorkers, their negativism worsened further (producing a -3.3 score) as the national manufacturing slump deepened during June.
But both sentiment surveys have veered considerably off-base since then.
In July, August, and September, domestic manufacturing production rebounded month-to-month in real terms by 0.60 percent, 0.38 percent, and 0.43 percent, respectively. (All these results could still be revised.)
But although New York Fed respondents boosted their ratings of general business conditions by 12 points in July, to a +11.1 reading, in August this assessment nosedived by 42 points, to -31.3. September saw a big (30 point) rebound, but at -1.5 remained in the red.
During the strong nation-wide manufacturing growth of July, Philadelphia area manufacturers lowered their business conditions views by 12 points to a -12.3 score. But when after-inflation U.S. manufacturing output kept growing in August (though by a somewhat slower pace), their ratings zoomed back up by 18.5 points to +6.2. And when nation-wide manufacturing growth picked up slightly in September, the Philadelphia companies’ drove their business conditions grade back down by 16.1 points, to -9.9.
As known by RealityChek regulars, I’ve previously identified a serious flaw in these sentiment surveys that’s called “survivorship bias.” That is, because they only look into the views of manufacturers that exist at that moment, they can miss setbacks suffered because of closures of all kinds, especially over time. In other words, to use an extreme example, if the U.S. manufacturing base had been reduced to a single company in a given month, and that company was in a good mood that month, a national sentiment survey would report that U.S.-based industry was doing just swimingly.
It’s hard, however, to figure out how survivorship bias would produce similar distortions in present circumstances.
But other reasons for the divergeance between the sentiment surveys and the actual data reports don’t readily come to mind, either. For example, it’s certainly possible that manufacturing conditions in the New York and Philadelphia areas these days differ significantly from those in the United States as a whole. Yet that explanation seems far-fetched given the thick web of links among domestic manufacturers in all regions (specifically, so often selling to and buying from customers and suppliers all over the country). It’s also strange how the New York and Philadelphia results differ not only from those of the entire economy, but from each other in some instances.
Maybe the real answer is that the latest New York and Philadelphia results are just short-term blips, and that over time they’ll start converging with the national results? We may not know that until more time passes.
What we do know, though, is that in October, the former’s results sank further in October (by 8 points, to a -9.1 read) and the latter’s edged up by 1.2 points, but was still -8.7. So let’s see how consistent they are with the Fed industrial production numbers for that month, which are slated to come out on November 16. Mark your calendars!