Business Outlook Survey

By Ryan Barnes

Release Date:	Third Thursday of the month
Release Time:	12pm Eastern Standard Time
Coverage:	Current month's data
Released By:	Federal Reserve Bank of Philadelphia
Latest Release:	http://www.phil.frb.org/econ/bos/bosschedule.html

Background
The Philadelphia Federal Reserve's Business Outlook Survey (also known as the Philadelphia Fed Report) is a monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey and Delaware. The survey is conducted in the vein of the Purchasing Managers Index (PMI) report; it questions voluntary participants about their outlook on things such as employment, new orders, shipments, inventories and prices paid. Answers are given in the form of "better", "worse" or "same" as the previous month, and, as with the PMI, results are diffused into an index, only this index uses a median value for expansion of 0, rather than 50. The Philly Fed Report signals expansion when it is above zero and contraction when below. As a result, values can be negative month to month.

The survey has been conducted each month since May 1968, and is considered one of the most valuable regional purchasing manager indexes (There are currently almost 15 such regional reports, covering much of the U.S., albeit in piecemeal fashion).

What it Means for Investors
As far as regional manufacturing reports go, the Philly Fed Report is one of the most watched, both for its early delivery to investors (released before the month is even over), and its blend of manufacturing sectors and businesses. The Philly Fed Report, along with the Chicago NAPM Index, have shown high correlations to the upcoming and hugely followed PMI report.

This index isn't typically a big market mover (due to its small sample size and limited geographic range), but if a big surprise in terms of percentage change appears in the report, quick-thinking investors may anticipate similar changes to the PMI and make market moves accordingly.

The report is presented with solid commentary from the Reserve Bank itself, and often includes special survey questions that may be extremely timely if the economy is unsure of future growth possibilities.

Strengths:

• Survey is very timely, coming out before the end of the month. It is the first regional report to be published.
• There are often special questions in the survey (like at year end) regarding things like prospects for company sales, or commodity and energy prices.
• The three states covered have a diverse mix of manufacturing sectors, from old line steel and coal to modern chemicals and semiconductors.
• The report is concise and readable.

Weaknesses:

• Only manufacturing sector is represented here
• Only covers three states
• Survey is very subjective and may be based on perceptions.
• Data can be very volatile month to month due to sample size. Changes of more than 50% in a month are not uncommon.

The Closing Line
The Philly Fed Report may be the most respected of all the regional purchasing manager reports. It should not be acted on in isolation, but it does represent a diverse area of the country, and has shown more than a 75% correlation to the upcoming PMI in studies. Therefore, it contains clues about the general market.

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