- The Philadelphia Fed Index continued its positive trend and rose for the sixth consecutive month in February.
- Notably, the survey suggested a pickup in demand and improvements in inventory situations.
- As manufacturing activity and outlooks continue to improve, firms will need to raise output to restock lean inventories, necessitating additional spending and hiring more workers—further bolstering demand and consumption in a positive feedback loop.
- Just as stocks recover in a V-shape and stock categories that fall the most bounce the most, so too do economic areas that fell the most—this is what we are seeing today in manufacturing.
From Thursday's unexpected rise in initial jobless claims, it could seem the US economic recovery is still on pins and needles. But looking at recent manufacturing reports provides a sensation more like pricks of excitement—for the sixth consecutive month, a key manufacturing survey showed strong growth.
The Philadelphia Fed Index, a regional survey covering general activity, new orders, shipments, inventories, prices paid and received, and employment in the mid-Atlantic manufacturing sector, continued its positive trend in February. Notably, the survey suggested a pickup in demand and improvements in inventory situations. New orders rose by 20 points and current shipments by 9 points, intimating higher demand for manufactured goods. The number of firms saying inventories are too low and expected to increase in the first quarter are three times higher now versus a year ago, while those saying inventories are too high and expected to decrease fell from 43.9% to 18.1%. For the third consecutive month, more firms are reporting employment increases than decreases, and for the tenth straight month, those expecting employment to increase over the next six months outnumbered those expecting declines.
These responses show not only an already improving economic picture, but also suggest strong future growth ahead. As manufacturing activity and outlooks continue to improve, firms will need to raise output to restock exceptionally lean inventories, necessitating additional spending and hiring more workers. In turn, this will further bolster demand and consumption in a positive feedback loop. Interestingly, looking at the past 10 recessions, it appears year-over-year industrial production typically dips and rises in a V-pattern—which has already happened—right before economic expansion, furthering the case the US economic recovery is well underway.
Of course, recovery will continue to be staggered across different economic segments, with labor and housing markets still conspicuously lagging. And that's normal—in every cycle, all economic areas don't move in lockstep—some lead, some lag. But broader economic growth should drive improvements in these areas—not the reverse. As fears over US economic stagnation or even a second round of recession fall away, it will provide more steam for the bull market to charge ahead.
We've said many times the severe reduction in inventories by firms through the recession means they will eventually be forced to sharply march the other way. Just as stocks recover in a V-shape and stock categories that fall the most bounce the most, so too do economic areas that fell the most—this is what we are seeing today in manufacturing.