What it means
While the survey itself contains many questions, the index people quote in the news is the current general activity reading. It condenses the answers into a single figure that moves above and below zero.
Traders and economists use it as a quick snapshot of factory conditions in the mid-Atlantic region. The index is a diffusion index, meaning it subtracts the share of firms reporting a decline from the share reporting an increase.
Because the answers are balanced around zero, the scale is not a percentage change in output. A reading of +20 means a considerably larger share of firms reported improvement than deterioration, not that activity grew by 20%.
Readers typically look at three things: the level, the change from the previous month and how both compare with forecasts. Markets react mostly to the difference between the actual number and the expectation, so a modest positive reading can still disappoint if economists expected something much stronger.
The index is also quite volatile, which is why many analysts use a three-month moving average. It is part of a family of regional surveys run by other Federal Reserve banks, and analysts often compare them.
Combined, they offer a preview of the national manufacturing surveys and of official industrial output data. For businesses, the index is a cheap, timely indicator of demand, particularly for firms selling to factories.
Limitations should be kept in mind. The sample is relatively small and regional, and the industry mix differs from the national economy.
The index also reflects sentiment and judgement from respondents, so it is best used alongside hard data, such as production, orders and your own sales.
In practice
Real-world examples.
Example
An equity strategist sees the index rise to +16 from +4, with forecasts at +8. She raises her view of industrial companies, expecting the national manufacturing report to follow the same direction. The following week the national survey confirms the improvement, and her call is vindicated.
Example
A chief financial officer of an industrial distributor tracks the three-month average in her monthly board pack. When it turns negative for the first time in a year, she asks the sales team for a more cautious revenue forecast. She also records the reading next to the company's own order intake so the board can see the link.
Example
A bond market analyst notes that the index of prices paid is rising while the general activity index is falling. He interprets it as a warning of weaker growth combined with cost pressure, which affects his view on interest rates. He pairs it with the employment sub-index to judge whether firms are hiring or only raising prices.
Formula
Calculation
Index = % of firms reporting increased activity - % of firms reporting decreased activity
Three-month average = (month 1 + month 2 + month 3) / 3
Suppose 38% of firms report higher activity and 22% report lower activity, so the index is 38 - 22 = +16. The previous two months were +4 and -2. The three-month average is (16 + 4 + (-2)) / 3 = 18 / 3 = +6, which shows that the latest reading is stronger than the recent trend. Smoothing the series in this way is why many analysts quote the average beside the monthly reading.Case study
Seen in the real world.
Pinecrest Industrial Supply is an illustrative, fictional business selling fasteners and tools to factories. Its owner asked the finance manager whether it was worth watching public economic indicators.
The finance manager compared three years of monthly sales with the regional index and found that sales growth typically followed the index by about two months. She built a dashboard that showed the three-month average beside the company's order intake.
When the average dropped from +10 to -6, she recommended trimming stock orders by 10% ahead of the slowdown. The illustrative lesson is that a regional index can be a practical early warning for a supplier whose customers are manufacturers. Later she added the index of prices paid to the dashboard, which gave the buying team an early warning of supplier price increases.
Watch out
Common mistakes.
- Reading a +20 reading as 20% growth, when the index only shows the balance of firms reporting improvement versus decline.
- Reacting to a single month without looking at the three-month average.
- Forgetting that the market reaction depends on the surprise relative to forecasts, not only on the number itself.
Questions
People also ask.
Is the Philadelphia Federal Index the same as the Philly Fed Index?
Yes, they are two names for the headline general activity reading from the same survey.
What is a good reading?
Anything above zero indicates expansion, and the higher the figure, the broader the improvement, though readings above or below the recent range matter most.
How is it different from the ISM index?
The ISM index surveys purchasing managers across the country, while this one surveys manufacturers in one region and is published earlier in the month.
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