What it means
The survey is formally called the Manufacturing Business Outlook Survey. A panel of manufacturing firms in the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey and Delaware, answers a short questionnaire each month.
They are asked to compare the current month with the previous month and to give expectations for six months ahead. Each question has three possible answers: higher, the same or lower.
The results are summarised as a diffusion index, which is the percentage of firms reporting an increase minus the percentage reporting a decrease. A reading above zero indicates expansion, a reading below zero indicates contraction, and zero means the balance is neutral.
The survey covers several areas, including general activity, new orders, shipments, employment, hours worked, prices paid and prices received. The general activity index is the headline number most often quoted in the financial press.
The sub-indexes provide clues about hiring and inflation pressures, which makes the survey useful beyond a simple growth signal. Because it is a sample of firms in one region, it does not map exactly onto national output.
It is, however, among the first regional surveys to come out each month, and markets often react to it as a guide to the ISM manufacturing report and to official production data. A surprise relative to forecasts can move bond yields, currencies and equity prices.
Managers can use it as a free external check on their own business. If your orders are falling while the survey is rising, the problem may be company-specific rather than a matter of the wider economy.
Remember also that the data are noisy and are often revised, so the trend over several months matters more than a single reading.
In practice
Real-world examples.
Example
A currency trader sees that the survey's general activity index comes in far below forecast. She reduces her expectations for the strength of the economy and adjusts her positions before the national manufacturing report arrives. Within the hour, bond yields and the currency move in the direction she expected.
Example
A procurement manager at an industrial supplier notices that the prices paid sub-index has risen for three months. He negotiates longer fixed-price contracts with his own suppliers before costs rise further. He recognises that the survey is partly a leading indicator of inflation as well as of growth.
Example
A bank economist includes the survey in a dashboard of early indicators. She compares its three-month average with industrial production and uses the two together to update her growth forecast. She keeps a note of the survey's revisions, because later figures can differ from the first release.
Formula
Calculation
Diffusion index = % of respondents reporting an increase - % of respondents reporting a decrease
Suppose 100 manufacturers respond. 40 report higher new orders, 25 report lower and 35 report no change. The index is 40% - 25% = +15, which signals expansion in new orders. A reading of -10 in the following month, for example 20% higher and 30% lower, would signal that conditions had slipped back into contraction. The sub-indexes work in the same way, so a prices paid reading of +30 means many more firms reported higher input costs than lower ones.Case study
Seen in the real world.
Tidewater Machine Parts is an illustrative, fictional supplier to regional factories. The finance director noticed that the company's order book was always strong when the regional survey was above zero and weak when it fell below.
She built a simple rule: if the survey's new orders index averaged below -5 for two months, the company would delay hiring and cut planned overtime. When the index fell to -12 for two consecutive months, the company deferred a purchase of a $300,000 machine.
Three months later, orders did fall by 8%, and the company avoided carrying surplus capacity. The illustrative lesson is that an external indicator does not need to be perfect to improve timing. She reviewed the rule every year against actual orders and adjusted the trigger level, since the relationship between the survey and the company's sales was never perfect.
Watch out
Common mistakes.
- Treating one month's reading as a trend when the data are noisy and revised.
- Assuming the survey measures the national economy, when it covers manufacturers in one region.
- Reading the index as a percentage growth rate, when it is a balance between those reporting increases and those reporting decreases.
Questions
People also ask.
What does a reading of zero mean?
It means that the share of firms reporting increases equals the share reporting decreases, so conditions are broadly unchanged.
Who runs the survey?
It is carried out by the Federal Reserve Bank of Philadelphia, which publishes results monthly.
Why do investors watch it?
It comes out early in the month, so it gives a first look at manufacturing conditions before many national figures are published.
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