Does an Odd Economic Tidbit Reveal Surging Optimism?

by Joseph Carson, AllianceBernstein

The Philadelphia Fed Index, a leading measure of US economic activity, beat analysts’ expectations. But what caught our eye—and many others’ as well—was a detail within the survey: the future index jumped more sharply than it has since February 1991, when the first Gulf War ended unexpectedly quickly.

The Philly Fed Index, released this morning, declined at a rate of 1.9 in September, compared to its 7.1 rate of decline in August. While that’s still weak (it indicates continued contraction in manufacturing for the region), it’s relatively good news that manufacturing is contracting less rapidly. Some other details are very soft: a sharp decline in shipments is probably capturing some of the production decline we’ve seen in industrial production data.

But the future index rose from 12.5 to 41.2, its best reading since January and its largest spike in nearly 22 years. That’s significant. Of what?

The future index reflects manufacturers’ optimism about the next six months. That covers the November election and the fiscal cliff, two major sources of uncertainty manufacturers have been grappling with.

We think a surge in optimism of that magnitude is very possibly an indication that manufacturers expect the fiscal cliff to be averted.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Joseph G. Carson is US Economist and Head of Global Economic Research at AllianceBernstein.

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