Philly Fed and Empire State turn down

I mentioned this indicator (the average of the Philly Fed and Empire State surveys), recently.  It only covers part of the US, and is "spiky", but, smoothed, it correlates with the ISM survey, which covers the whole of the US.    The reason I mentioned it was because it was one of the few time series which was rising, and I wanted to caution you that not all indicators pointed towards recession.  However, over the last 2 months it has turned down, to make it more consistent with other indicators.

In fact, the average of all five of the Fed's regional surveys has started to slide:

PERDK stands for Philly Fed, Empire State, Richmond Fed, Dallas Fed & Kansas Fed

Philly Fed flat, but .....

 Just a quickie before I go to bed.

The Philly Fed index was unchanged for June.  So the average of the Philly Fed and the Empire State fell, and smoothed (it's very "spiky") continues to decline.  Recession still seems likely.   The trend is down.  These are regional Fed surveys, but correlate well with the national ISM survey.

Empire State survey slumps in June

The Empire State survey by the NY Fed is only one of the 5 regional Fed surveys.  But, as you can see, its correlation with (national) GDP is quite good.  It is one of the earliest indicators of economic activity in the most recent period.  In a few days, the Philly Fed survey will be released, and this has an even better correlation with GDP.  We'll see what that shows. 

In the chart below, I have smoothed the Empire State data using a 5-month centred moving average, and plotted it with a 3-month lag.  In other words, the plunge in the survey gives a forecast of the next three months, and points towards falling GDP.   

Data through June 2025.

Fed surveys plunge

This is the average of the Fed's Empire State and Philadelphia surveys, extreme-adjusted.  It correlates well with economic activity, and is among the earliest indicators available for the current month.  The latest data point is for March.  

The average of the Philly Fed and the Empire State indices had been rising strongly, pointing towards an economic recovery.  The plunge in March is ominous, and a reversal of the trend over the last year.  This is another pointer towards an economic slowdown --- I talked about falling consumer sentiment here. 

Even an extreme-adjusted average of these two indices is "spiky", so perhaps we ought not read too much into the latest values.   However, the evidence is mounting that Trump's tariff war, and other policy measures, are rapidly worsening business and consumer confidence, and decreasing economic activity.   Every month that this heightened uncertainty continues will exacerbate the impending downturn.  

Preliminary indications that US growth continues

There are several regional Federal Reserve Bank surveys, which correlate well with overall economic activity, though they are "spiky" and need to be smoothed.   The average of the Philadelphia Fed and the NY Fed surveys only covers the NE of the United States, but it correlates remarkably well with the overall national ISM (Institute of Supply Management) survey (for which July data won't be available for another 2 weeks.) 

After a weather-related slump in January, the average has recovered strongly, suggesting that the same will happen to the ISM in July, and that the economy continues to pick up.  Of course, there have been other indicators which suggest it's slowing down, in particular in services, where it looks as if the Covid "revenge spending" splurge is over.   I expect a sustained but slow recovery over the next few months.

Philly Fed/Empire State Surveys still trending up

The NY Fed's "Empire State" and the Philadelphia Fed's "Philly Fed"  only cover the NE of the USA, but usually their average value correlates well with the two national surveys by the ISM.   Right now, the two are diverging: the smoothed extreme-adjusted average of the Empire State and Philly Fed surveys is still trending up, while the extreme-adjusted ISM is still falling, though more slowly.

This has happened before, though not often.  For example, in 2019, the two diverged only for the Philly Fed/Empire State average to snap back to ISM in 2020.

Services are holding up the economy.  If services start to fall, the US will fall into recession.  We'll get some indication of whether this is happening when the "flash" estimates of manufacturing and services PMIs are released early next week.

This is the average for the Philly Fed and Empire State surveys before extreme-adjustment and smoothing:

Philly Fed and Empire State up in June

The average of the Philadelphia Fed and Empire State surveys by the two Federal Reserve Banks in Philadelphia and New York respectively has spiked up in June.   I have extreme-adjusted and smoothed the average (the red line in the chart below) and compare it with the ISM index, which is a good leading indicator of growth.  It suggests the ISM index will increase in June.  Interesting: longer-term indicators are still pointing down.

Empire State & Philly Fed fall in May

In May, one went up by a lot and one fell by a lot.   The average fell, and the smoothed average continued to slide, though its rate of descent has diminished.

Click on chart to see a clearer image

Fed survey average still falling

 There are 5 regional Federal Reserve Bank surveys, from the Fed branches in Kansas, Richmond, Philadelphia, Dallas and New York.  The simple average of these surveys is well correlated with overall US GDP, and also national surveys such as the one from the Institute of Supply Management (ISM) and S&P Global's PMI survey, even though the 8 states covered by the San Francisco Fed are not included (that Fed branch doesn't do a survey).  There is a Chicago ISM from the same ppl who do the national ISM, but it isn't published early, so it gives us no hint of the national ISM's trends.  It correlates very well with the national ISM.

Conclusion:  the US economy continues to slide into recession, though the rate of descent may have slowed.

YOY GDP likely to be negative in Q1.
As usual, clicking on the charts will produce a clearer image.
Don't ask me why.  I know not.

"Flash' PMI increase in March likely to be a blip.

Empire State and Philly Fed point to deepening recession

The Fed's 'Empire' State and 'Philly Fed' surveys, even though they cover just the NE of the United States, are well correlated with the national business cycle.  Because these two time series are "spiky", in the chart below, I have extreme-adjusted and smoothed the average of the Empire State and Philly Fed surveys.

No sign of an imminent upturn!

Philly Fed & Empire State surveys still sliding

 Two regional Fed surveys come out early in the month, giving us a good guide to trends in the whole US economy.  Because they only cover the NE United States, their results are not conclusive; nevertheless, the correlation is close.  Because the monthly data are "spiky", I've extreme adjusted and smoothed them.  We are still not yet at the depths of the GFC in 2008/9, but we're heading in that direction.

US regional surveys point to further declines in January 23

 Several of the regional offices of the Federal Reserve Bank do surveys of the districts they cover.  The two earliest available for the month are the surveys by the Philadelphia ("Philly Fed") and the New York ("Empire State") Feds.  

We have the data from these surveys for January, and the smoothed average, which correlates very well with the national ISM (Institute for supply management) surveys, slid again in January.  Make of that what you will; for my part, I think the share market is too optimistic about the risks of recession.  Remember that at this stage during the GFC, the Fed was already slashing interest rates.  This time round, it's planning to raise them, though by smaller increments than it has been.

Time series are extreme-adjusted

July ISM likely to slump

The July ISM survey won't be out until Monday.  But it correlates very well with the average of the five regional Federal Reserve's surveys, as you can see in the chart below.  The fit isn't perfect, but it's very close.  So I expect a further decline in the ISM for July.

Will sustained falls in the ISM, Fed surveys, and the PMI survey lead to the Fed stopping its pattern of increasing the Fed Funds rate?   I doubt it.  It hasn't in the past!  The Fed will want to see other confirmatory data, for example, rising unemployment rates, falling employment, falling retail sales.  

Will Russia's invasion of Ukraine, and the likely European recession, stop the Fed from raising rates?  Well, it might.  But it might equally encourage them to keep on upping rates.  Wars are associated with high inflation.  This isn't (yet!) a war where the USA is waging a total war as it was in WW2, where the Fed keep the Fed Funds rate low and massaged the bond market to ensure long rates didn't rise either.

The problem is that the economy responds with a lag to changes in interest rates, and inflation with an even longer lag.  Of course, the Fed knows this.  But it got "behind the curve", waiting too long before it raised interest rates after the economy rebounded from the Covid Crash.  Their fear will be that inflation expectations get embedded into the economy, making it much harder to keep inflation low. 

The balance of probabilities is that they will raise the Fed Funds rate at least twice more.   

All Fed regional surveys falling ....

 .... even Dallas's, despite the oil price.  The unweighted average of the  5 Fed regional surveys (Kansas, Dallas, Richmond, Empire State and Philly Fed) tracks the ISM national survey closely.  In the chart below, this average, and the ISM, are extreme-adjusted then fitted with a 3-month centred moving average.

US data suggest further slowing in June

 The two earliest surveys which can give us an idea of what's happening in the US in the latest month are the Philadelphia Fed and Empire State surveys by the Philadelphia and New York branches of the Federal Reserve Bank.  Although these surveys cover only the NE of the United States, the correlation with the national ISM  survey is good ― though not perfect. 

 As usual, the survey data are 'spiky'.  I have extreme-adjusted these time series, and also have fitted a 3-month centred moving average to the Philly Fed/Empire State series to get a clearer picture of the underlying trends.  

We're still 11 days away from 'official' ISM  and PMI  data, but what we have so far suggests a further slowdown in the US economy.  Will this make the Fed more reluctant to raise rates?  Prolly not.  They will only ease off when inflation peaks, and inflation tends to lag economic activity.

US PMIs skid

As ever, the first data out for the US economy are the "flash" PMIs and some of the Fed's regional surveys. 

The first chart shows the PMI  for manufacturing with its extreme-adjusted version. As you can see, the extreme-adjustment algorithm thinks the decline is an anomaly, and partially adjusts for it. 

The chart below shows the PMI compared with the average of three regional Fed surveys, the Philadelphia, Empire State and Kansas Fed.  If anything, the Fed surveys point towards an even deeper decline.

The final chart shows the average of the extreme-adjusted manufacturing and services PMI surveys.  Once again, this points to a deep recession.  No surprises there.

Hitting the wall --Philly Fed plunges.

The Empire State survey from the New York Fed pointed towards a deep downturn.  The latest of the regional Fed surveys, the "Philly Fed" gives the same message.  The nascent economic upturn has hit the wall.  It was the biggest one month fall ever recorded.

 In the chart below, I've averaged the two surveys, which reduces random fluctuations.  Now, note, the latest decline has come before the US itself goes into lockdown.  It is very likely that economic data will go on falling for several months as the impact of the virus echoes and re-echoes round the world.  So, provisionally, it seems very likely that US GDP at its worst point will be down by as much as during the GFC, that is, by -4% year on year.  And probably by more.  Note also that GDP lags the movements in the Empire State/Philly Fed average index by 3 months.  So even if Emp/Phil surveys bottom in May, GDP will only bottom in Q3.

USA heading for deep economic downturn

We've just go the first of the regional Fed surveys for the US for March, the 'Empire State' (NY) survey. It fell sharply.  Now, note, this was before any US lockdown.  It was a consequence of the steep decline in China in February.  In the last few days we have seen lockdowns in several European countries, and at some point, because the US has been so dilatory in dealing with its own coronavirus epidemic, in the US too.  During this crash, companies and individuals who started out with too much debt or not enough cash will go bankrupt.  So even when the epidemic dies down (if it does!) spending growth won't pick up quickly.  Based on the Empire State survey we are already looking at a downturn which is at least as bad as the GFC in 2008/2009.  But economic activity will decline steeply in April and May and may level off in June.  We could be looking at a 8-10% year-on-year decline in GDP in Q2.

Empire State and Philly Fed trend is up

It's only 2 of the regional surveys in the US, but the fit with overall (national) GDP is good.  The one period where it didn't work is H2/2005-H1/2006.  There was also a rally in 2011 which fizzled.

And, over the last couple of months the average hasn't correlated well with the average of the PMI and ISM surveys, which have continued to slump even as the Philly Fed/Empire State series have risen.  Perhaps it's a regional thing, with the NE less affected by the trade war.  Or perhaps it's just random.  But the yield collapse in Treasuries suggests that we are far from the bottom of the recession.

Was that it? Is the US recession over?

After big falls in June, both the Philly Fed and the Empire State surveys rebounded.  As you can see in the chart below, the rebound suggests that the US "recession" is over. 

OK, these are just 2 of the Federal Reserve's 5 regional surveys.  Yet the fit with the cycle (using GDP growth to measure it) is good, though not perfect.  However, taken together with my US diffusion index, which has turned up, it suggests that the US economy is recovering.  It's possible that the economy suffered a shock after the trade wars started, and now that supply lines have been partially rejigged, and confidence has recovered, it has picked up.  Or it is undergoing just another of the those mini cycles we have had since 2010. 

What this means, though, is that after the Fed's probable rate cut at the end of this month, there will be no further rate cuts.  Which has implications for bonds (the bull run in Treasuries is over), for the US $ (likely to continue to strengthen), and for equities.  Wall St is battling the head wind of falling company profits  right now, but if the economy is rebounding, so will earnings.  Meanwhile, it scarcely seems possible that the Fed will raise rates yet.  So there will be a brief "sweet spot" where earnings are likely to increase while interest rates don't. 

What about the rest of the world?   It is because of global weakness that I think the Fed will cut at the end of July.  If, though, the US economic growth heads back to 3%, domestic considerations will trump (as it were) foreign conditions, meaning that there will be no further cuts should that happen.

We still have to worry about Trump's erratic switches concerning trade wars and blood wars, of course.  And I can't help you there.