Philadelphia Fed Index Monthly Chart Hinting at Recession Ahead

The Philadelphia Fed Index signals a recession ahead. The Philly Fed Index drops to -24.3 for February way below the -8.9 for January. Here is a link to the Philly Fed Survey. Chairman Powell clutches his chest and falls back into the leather chair. A few recent data points have pointed to a stronger economy and potential growth so the Federal Reserve has been comfortable saying there is more upside in rates going forward. A -24.3 Philly Fed does not fit this happy narrative.

Keystone likes to use a 4-month MA to note the progress of the Philly Fed. The Philly Fed number fell below its 4-month moving average in September. The first negative reading for the Philly Fed Index was -2.8 in June. August showed signs of life again with a positive +6.3 but the Philly Fed is negative ever since with the very low -24.3 reported yesterday.

The Philly Fed is below its 4-month MA since last September, a half-year now, with the exception of last month. January was -8.9 that moved slightly above the 4-mth MA at -11.3 but this was short-lived since the -24.3 is clearly back below the 4-mth MA now at -15.6. The failure of the Philly Fed below its 4-mth MA indicates recession ahead.

Further, the red boxes show that the Philly Fed Index is a great predictor of recessions. The -24.3 reading now takes the index into the red box territory. Note that the low spikes in the index that did not result in recession (blue lines) are all taken out by the current numbers further bolstering the recession case.

The strong jobs picture that emboldens the Fed for more rate hikes may simply be people jumping jobs left and right because Harry pays 25 cents more an hour than Belinda. Then they quit that job the next day to work for Hiroko because she pays 50 cents more per hour than Harry. 

Much is said about the JOLTS data and the great number of job openings. Not so fast. Of the 10 or 11 million job openings, remember that a good 5 million plus were sitting there pre-pandemic. Businesses play games to skirt equal-opportunity laws (EOE) so a lot of ads are bogus. Also, companies run ads only looking for the combination Albert Einstein, marathon runner, skydiver, charity worker on weekends, and skilled-orator employee that works for peanuts. Companies nowadays are likely running many employment ads and leaving them in place since they know that one-half the people they hire today will be gone in a month.

Thus, the 10 or 11 million JOLTS job openings are really 5 or 6 million off the get-go. Take away another 2 million due to people with long-covid or caring for loved-ones that may have extended and ongoing health problems after the brutal 3-year pandemic. Some folks, like healthcare workers, are burned-out from the last 3 years and simply need time off to recover. Thus, the JOLTS are down to maybe 2 to 4 million job openings.

Then takeaway ads that companies likely leave up indefinitely due to the way the economy is post-pandemic compared to pre-pandemic so that is another 1 or 2 million job openings in the data. Also, many of the jobs are the low-paying low-skilled jobs such as burger-flipper's, bedpan-cleaners, table-waiters, sheet-turners, etc... (great respect for the folks that do these jobs), so job openings do not mean more high-paying jobs. When you consider the JOLTS number in the context presented here, the 10 or 11 million job openings, after a once-in-a-century pandemic, does not sound like anything special, does it?

The Philly Fed Index is in the recession camp as the Federal Reserve is convinced that continued rate hikes should occur going forward. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added Ash Wednesday Morning, 2/22/23: Wall Street analysts, economists and central bank officials are singing in unison that a recession is not in the cards going forward. The PMI Services Index pops above 50 so the services sector is being waved as the banner of great times ahead. US Existing Home Sales are at the lowest level in over 12 years but hey, look at those services.