Few people woke up on Thursday morning worrying about the Philadelphia Federal Reserve Bank’s business outlook survey diffusion index of general business conditions. At least, it is to be hoped that most of us had other things on our minds, writes John Authers in Friday’s Short View column.However, even secondary data about manufacturers’ intentions can move world markets if they are surprising.
And the Philly Fed on Thursday administered such an ugly shock that it sent stock markets, and the dollar, reeling.
The index, compiled by asking manufacturers about their plans for the coming months, has functioned as a good recession indicator in the past. A negative reading of 20 or worse suggests a recession is coming.
Had it come reasonably close to economists’ expectation of -1.5, nobody would have noticed, particularly with congressional testimony from the Fed’s Ben Bernanke to come.
But the index came in at -20.9, its lowest since the aftermath of the 9/11 terrorist attacks. That was enough to send investors for the exits.
When they awoke, investors were probably more worried about Mr Bernanke’s testimony, a set-piece event of the financial year that the Fed uses to set the market’s expectations.
Central bankers can never declare victory over inflation, or show alarm. So when the Fed chairman said that “the downside risks to growth have become more pronounced”, that “overall and core inflation should moderate this year and next”, and that he was prepared to “take substantive additional action” in “a decisive and timely manner”, he was flagging imminent drastic easing of monetary policy about as openly as a central banker can ever do. In this context, what was most alarming about the market’s response was its lack of excitement.
For the time being, traders’ worries about a recession trump any hope that they can profit from lower interest rates.