Regional Fed Surveys (Empire, Philly, etc.)

What Regional Fed Surveys Measure

Five Federal Reserve banks conduct monthly surveys of businesses in their districts, providing early reads on manufacturing conditions before the national ISM data:

The point is: The Empire and Philly surveys release before ISM, giving investors an early signal of national manufacturing trends.

Survey Methodology

Each regional Fed surveys manufacturers in its district about business conditions:

Common questions:

• New orders: Higher, same, or lower than last month?
• Shipments: Higher, same, or lower?
• Employment: Increasing, stable, or decreasing?
• Prices paid/received: Higher, same, or lower?
• Future expectations (six months ahead)

Diffusion index calculation: Index = (% reporting increase) - (% reporting decrease)

Interpretation: Zero indicates no change. Positive values indicate expansion; negative values indicate contraction.

Empire State Manufacturing Index

The NY Fed's Empire State survey is the most watched because it releases first each month:

Worked example (October 2024):

• General Business Conditions: -11.9 (contraction)
• New Orders: -10.2
• Shipments: -2.4
• Future Expectations (6-month): +38.7 (optimistic outlook)

Current weakness combined with positive expectations suggests anticipated improvement.

Philadelphia Fed Survey

The Philly Fed survey covers Pennsylvania, New Jersey, and Delaware—a manufacturing-heavy region:

Key metrics:

• General Business Activity Index
• New Orders Index
• Employment Index
• Prices Paid Index

Historical significance: The Philly Fed survey has run since 1968, providing the longest regional manufacturing time series.

Relationship to ISM: Research shows Philly Fed and Empire combined explain approximately 60-70% of month-to-month ISM variation.

Using Regional Surveys to Predict ISM

Investors combine early regional surveys to forecast the national ISM Manufacturing PMI:

Simple approach:

1. Weight Empire and Philly by relative sample size
2. Adjust for historical bias
3. Compare to ISM release a few days later

The practical point: If both Empire and Philly surprise positively, ISM is more likely to beat consensus. If they diverge significantly, ISM may fall between them.

Historical correlation:

• Empire State alone: ~0.5 correlation with ISM
• Empire + Philly combined: ~0.7 correlation

Prices Paid Subindex

Each regional survey includes a prices paid component that signals input cost pressures:

Why it matters: Prices paid readings lead CPI goods inflation by approximately 3-6 months.

Employment Subindex

The employment component signals manufacturing hiring trends:

Interpretation:

• Positive readings: Net hiring
• Negative readings: Net layoffs
• Large negative readings precede manufacturing job losses in employment report

Worked example: If Empire employment reads -15 and Philly reads -12, expect weak manufacturing payrolls in the upcoming employment report.

Future Expectations Component

Each survey asks about conditions expected six months ahead:

The signal:

• Strong current + strong expectations = Sustained expansion
• Weak current + strong expectations = Expected recovery
• Strong current + weak expectations = Peak warning
• Weak current + weak expectations = Prolonged weakness

The durable lesson: The expectations component often leads actual conditions by 2-4 months. Watch for divergence between current conditions and expectations.

Regional Variation

Different Fed districts have different industrial compositions:

The practical insight: If Dallas is weak while Philly is strong, investigate energy vs. industrial divergence rather than assuming national weakness.

Common Pitfalls

• Overweighting any single regional survey: Use the average of available readings
• Ignoring the sample size: These surveys have smaller samples than ISM
• Missing the timing: Empire releases mid-month; ISM releases first business day next month
• Treating diffusion indexes as growth rates: A reading of +10 does not mean 10% growth

Reading Survey Reports

Each Fed bank's report includes:

1. Headline index with chart
2. Component breakdown
3. Special questions (rotate monthly)
4. Historical context

Special questions: Occasionally, regional Feds ask about topical issues (inflation expectations, supply chains, AI adoption). These one-off questions provide valuable qualitative insights.

Checklist for Regional Fed Survey Days

Empire State (mid-month):

• Note headline vs. consensus
• Check new orders and employment
• Compare to prior month's Philly Fed
• Note expectations component for forward view

Philadelphia Fed (mid-month):

• Compare to Empire released earlier
• Weight the two for ISM forecast
• Check prices paid for inflation signal
• Note any special question topics

Next Step

Track Empire State and Philly Fed readings alongside ISM Manufacturing for three months. Calculate your own weighted average and see how well it predicts ISM. This exercise builds intuition for using regional data as a leading indicator for national manufacturing trends.