Business Activity Is Up; Did the Fed Get It Right This Time?

Source: Thinkstock

Source: Thinkstock

The results of the various regional business activity surveys for July are likely to make the Federal Reserve ecstatic. Business activity has picked up pace and is touching multi-year highs. The number of new orders is rising and employment is upward bound. Price pressures are building up as well. However, some of the regional surveys are showing dimmed view of the future in terms of sustained increases in these parameters for the next six months to a year.

According to the Federal Reserve Bank of Philadelphia’s Business Outlook Survey for July, the diffusion index of current general activity in the region increased from a reading of 17.8 in June to 23.9 this month. The index has remained positive for five consecutive months and is at its highest reading since March 2011. When majority of the parameters show positive growth, the diffusion index tends to be positive, and vice versa.

The index for current new orders increased 17 points in July to 34.2 and shipments increased 19 points to 34.2, according to the Philadelphia Fed survey. Unfilled orders remained positive at around 10 points, but the index was lower than 11.5 in July, which indicates higher capacity utilization by firms.

The pick up in business activity has come as a major boost for the labor markets. In June, the total unemployment rate unexpectedly fell to 6.1 percent and the economy added 288,000 jobs. The gains in the labor markets can be seen across multiple regions as well. The percentage of firms reporting increases in employment (24 percent) much exceeded the percentage reporting decreases (12 percent), according to the Philadelphia Fed survey. The workweek index increased 5 points, having been positive for the fifth consecutive month.