What Is the Philadelphia Federal Index?
The Philadelphia Federal Index (or Philly Fed Survey) is a regional federal-reserve-bank index measuring changes in business growth. It is also known as the "Manufacturing Business Outlook Survey."
- The Philadelphia Federal Index (or Philly Fed Index) is a regional federal-reserve-bank index measuring changes in business growth covering the Pennsylvania, New Jersey, and Delaware regions.
- When the Philadelphia Federal index is above zero, it indicates factory-sector growth, and when below zero, it indicates contraction.
- Also known as the "Manufacturing Business Outlook Survey," a rising index is often a signal that a bull market is on the horizon.
Understanding the Philadelphia Federal Index
The Philly Fed survey is a measure of regional manufacturing growth. When the index is above zero, it indicates factory-sector growth, and when below zero, it indicates contraction. The intention of the survey is to provide a snapshot of current manufacturing activity in this region, as well as provide a short-term forecast of manufacturing conditions in the area, which may provide an indication of conditions throughout the United States. It is also known as the Philadelphia Fed Index.
The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. It is considered to be a good gauge of general business conditions and may also be an indication of what to expect from the upcoming Purchasing Managers' Index.
The survey covers the Pennsylvania, New Jersey, and Delaware regions. Participants in the survey help indicate the direction of change in overall business activity at their plants as relates to factors such as employment, new and unfilled orders, inventories, as well as prices paid and received.
This monthly report often shares findings like from this example using August 2022 data. It stated as follows: "The diffusion index for current activity returned to positive territory in August after two consecutive negative readings, rising 19 points to 6.2 (see Chart). Most firms (47 percent) reported no change in current activity this month, while the share of firms reporting increases (26 percent) exceeded the share reporting decreases (20 percent). The index for current new orders climbed 20 points but remained negative for the third consecutive month at -5.1, and the current shipments index rose 10 points to 24.8."
Philly Fed Survey in Practice
Although the Philly Fed only queries manufacturers in a small subset of the United States, it may be a useful indicator of economic and business activity across the nation. Because manufacturing is central to overall economic activity, the health of the sector is an indicator of the health of the overall economy, and the survey could provide early indications of the problems in the regional sector and consequently in the entire U.S. economy.
Though there is contrary evidence of the strength of the survey’s predictive power, its publication can affect capital markets, as it is commonly quoted by news media and referred to by investment professionals and economists. Part of the value of the survey is the longevity of the available data, as the Philly Fed has been conducted continuously since May 1968, and monthly historical data is readily available.