Philly Fed Index Jumps to Highest Level in 2010 as Manufacturing SurgesIf the nation's factory sector is any indication, the U.S. economic recovery has only just begun: Manufacturing activity in the mid-Atlantic region unexpectedly surged in November, the Federal Reserve Bank of Philadelphia reported Thursday. The Philly Fed's Business Outlook Survey index jumped to 22.5 in November from 1 in October, it's highest reading since December 2009, the bank said.

Economists surveyed by Bloomberg had expected the index to rise to 5.6 in November. The index was at negative 0.7 in September. Readings above zero indicate an economic expansion in the manufacturing sector, while those below zero reflect a contraction.

Several key index components rose substantially in November. The closely followed new orders component -- a measure of future demand -- surged to 10.4 from negative 5 in October. The employees component jumped to 13.3 from 2.4, reflecting an increase in the rate at which companies added to employment. The average workweek rose to 10.9 from negative 6, which indicates increased activity. And shipments rose from 1.4 to 16.8 in November.

Capacity Utilization Increases

The prices-paid component rose to 34 in November from 31.5, and prices-received rose to negative 2.1 from negative 9 -- the combination of which suggests higher input costs paid for raw materials by companies and slightly lower prices received for their goods.

Economists monitor the Philly Fed survey and index because it typically provides an early harbinger of larger economic surveys released later, such as the Institute for Supply Management's manufacturing and services surveys.

The survey's special section in November asked companies about their capacity utilization rates compared to last year, and it found that the average utilization rate among firms polled increased to 72% from 69% in November 2009.

Also, the percentage of firms expecting to increase their capital spending on plant and equipment, 38%, was larger than those planning reductions, 20%. That's an significant improvement from the 16%/41% increase/decrease rate observed in November 2009.

Overall, November's Philly Fed report is clearly an unexpected favorable report for the U.S. economy. The top-line statistic surged, and there was strength in key components. Input price pressure continued, but given the Fed's concerns about the possibility of deflation, a bit of modest price pressure can be overlooked -- and even be considered benign -- for now.

Indeed, when the jump in the Philly Fed index is considered in the context of recent improvements in other key metrics, such as the leading economic indicators, and the fall in initial jobless claims, the November decline by the Empire State Manufacturing Index can be overlooked. The broad picture of the U.S. economy is one of a slowly improving expansion, led by the manufacturing sector and exports.

The missing component, of course, remains strong domestic job growth. Only when that appears will the U.S. expansion advance to a healthy annual GDP growth rate approaching 3%.

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