Economic Review - September/October 1992
Economic Review - September/October 1992
The Survey of Southeastern
R. Mark Rogers
he Federal Reserve Bank of Atlanta, like the eleven other Reserve Banks across the nation, monitors economic conditions in its region. Probably its most important reason for doing so is to contribute to the Federal Reserve System's task of setting appropriate monetary policy. In the Southeast one of the most important influences on the economy's performance is manufacturing activity, which is more variable than most other sectors and accounts for a larger employment share in the region than it does in the nation. Consequently, to augment its analysis of current conditions in the region's economy, the Atlanta Fed's research department in the fall of 1991 launched the first comprehensive survey to focus solely on changes in indicators of manufacturing activity in the Southeast.
Because the Atlanta Fed's Survey of Southeastern Manufacturing Conditions has a rapid turnaround -- less than three weeks for gathering, compiling, and reporting the data -- it provides very recent information on the southeastern economy not available from other sources. During the past year the survey has proved increasingly valuable as it has been refined, the number of participants has steadily increased, and the patterns of responses have been better understood. In November the Atlanta Fed plans to begin releasing the survey data as a regular economic report.
This article traces the development and construction of the survey and explains the methodology used in compiling and calculating indexes from the data. The article also describes some uses of the survey data.
Developing the Survey
Before the southeastern manufacturing survey was developed, the Atlanta Fed monitored regional economic conditions chiefly by collecting anecdotal information and analyzing statistical data collected from various public sources. Approximately every six weeks the research department's regional team conducted an informal survey of business contacts to prepare a summary of current information about economic conditions in the Sixth Federal Reserve District. (This summary is still compiled with those from the other Reserve Banks in a publicly available document, Current Economic Conditions by Federal Reserve District, known as the Beigebook. The Atlanta Fed's summary is also used in briefing documents prepared for the Atlanta Bank president's use at Federal Open Market Committee [FOMC] meetings.)1 Such contacts continue to provide valuable, up-to-the-minute information about regional conditions in all major sectors of the economy -- not just manufacturing. Adding information from a formal manufacturing survey was seen as a way to corroborate and augment anecdotal information and provide a basis for comparing over time the producers' reports about various flows within the manufacturing process, such as orders, production, shipments, and inventories.
The survey was limited to the manufacturing sector for several reasons. Manufacturing activity is more readily quantifiable than that of many services industries. Moreover, because the manufacturing sector is one of the more cyclical components of the economy and is a key factor in pulling the overall economy into recovery or recession, timely information about conditions in the sector is critical for regional economic analysis. Finally, manufacturing is also important as an export base and as a high-wage sector, especially in the Southeast.
The methodology of the Survey of Southeastern Manufacturing Conditions (discussed in detail in the following sections) has a long tradition. Both the Philadelphia and Richmond Reserve Banks have produced manufacturing surveys for a number of years (see John Bell and Theodore Crone 1986; Christine Chmura 1987/88), and each is similar to the longer-running survey conducted by the National Association of Purchasing Management (1990). While the Atlanta Fed's survey generally adopted the methodology developed by the Philadelphia and Richmond Feds, it differs in several aspects. After refinements based on responses of a small test pool of plant representatives surveyed beginning in August 1991, the format was finalized in December 1991.
Sampling Criteria. All surveys are developed using some method of drawing respondents from the complete population. The Atlanta Fed's manufacturing survey used the manufacturing facility's location as the first criterion, choosing panelists at production facilities from across the six states that, in whole or in part, make up the Sixth Federal Reserve District.2 Confining the survey to production facilities located in the Southeast eliminated companies headquartered in the region whose plants are elsewhere and, conversely, included plants operating in the region but owned by businesses headquartered in other parts of the country. This restriction makes the survey an indicator of activity in the Southeast exclusively.
Respondents also were chosen to reflect major industries in the broad range of manufacturing facilities within the region. They represent eighteen of the twenty industries classified as manufacturing industries according to the two-digit code of the Standard Industrial Classification (SIC) system (see Table 1).3
Dividing the Sample. In addition to classifying industries according to the two-digit SIC code, the Atlanta Fed survey's distribution of production units attempts to mimic the industry value-added distribution recorded in the 1987 Census of Manufactures.4 ("Value-added" refers to the value added during the manufacturing process to the raw materials and intermediate products used as inputs.)5 Currently, because its sample is small in relation to the number of classification categories, the survey distribution does not match exactly the Census of Manufactures' stratification. The Atlanta Fed survey weights each plant equally, and the distribution of respondents by industry varies somewhat from month to month. Table l shows the percentage distribution of respondents by industry for May-July 1992. As of September 1992, the survey was sent to approximately 250 manufacturing plants; the average response rate is slightly below 50 percent for the initial report.
The Atlanta Fed survey collects data on various types of manufacturing activity as indicators of trends, current activity, expectations, and plans. Manufacturers are first asked one question about the general performance of their firms' industry; the remaining questions relate to current and expected activity at their specific plants. Respondents are instructed to take seasonal variation into account and are assured of the confidentiality of their responses. They are questioned about production, shipments, new orders, order backlogs, materials inventories, finished goods inventories, number of employees, the average workweek, finished goods prices, raw materials prices, capital expenditures, new export orders, and supplier delivery time. The survey questions refer to three time frames: current month versus previous month, current month versus twelve months ago, and expected activity six months ahead compared with current levels. (See Table 2 for items and time periods.)
To minimize the reporting burden on panelists and to keep processing time to a minimum, the survey asks for the direction of changes for indicators rather than for specific levels of activity. For instance, instead of asking for the dollar volume of production for the current month, the survey asks whether production has decreased, increased, or remained unchanged.
State's Value-Added Manufactures as a Percentage of State's Total Value Added, 1987
|20||Food and kindred products||6.1||15.3||10.6||8.4||10.7||12.2||11.0||10.4||5.9|
|22||Textile mill products||7.8||D||D||D||D||3.2||1.7||2.2||4.9|
|23||Apparel and other textile products||7.1||3.1||5.6||1.2||7.2||5.6||4.9||2.8||4.7|
|24||Lumber and wood products||5.1||3.0||3.3||3.0||8.6||2.2||3.7||2.5||2.7|
|25||Furniture and fixtures||2.0||1.8||1.6||0.2||6.8||3.0||2.2||1.7||3.3|
|26||Paper and allied products||14.0||4.1||8.5||9.2||7.7||5.8||7.8||4.3||12.1|
|27||Printing and publishing||3.6||10.3||4.9||2.9||D||5.7||5.4||7.7||3.8|
|28||Chemicals and allied products||9.1||8.0||7.3||41.2||6.6||13.7||13.1||10.4||9.6|
|29||Petroleum and coal products||D||0.4||D||10.3||D||0.3||1.4||1.6||1.1|
|30||Rubber and misc. plastic products||6.4||2.5||2.4||0.9||4.5||5.8||3.7||3.8||4.9|
|31||Leather and leather products||---||D||D||---||D||1.0||0.2||0.4||---|
|32||Stone, clay, and glass products||2.8||4.3||3.3||1.6||2.8||3.5||3.2||2.9||2.5|
|33||Primary metal industries||8.6||1.2||2.9||0.9||2.7||3.1||3.1||4.0||2.7|
|34||Fabricated metal products||5.4||5.6||3.2||2.7||5.2||6.1||4.7||6.4||8.8|
|35||Machinery, except electrical||7.0||8.6||4.1||2.2||6.4||8.0||6.2||10.1||10.4|
|36||Electric and electronic equipment||5.6||12.6||7.1||4.9||8.9||6.3||7.7||8.2||11.2|
|38||Instruments and related products||1.3||10.2||1.5||0.2||0.6||2.0||3.1||6.1||1.6|
|a Average for May-July 1992.
b D indicates that data are withheld by Census because of disclosure regulation. Omission indicates that industry is not represented in that state.
Source: U.S. Department of Commerce, Census of Manufactures, 1987.
Compiling the Data
The survey questionnaire requesting data pertaining to a particular month, along with the previous month's summary data, is mailed to manufacturers on approximately the twenty-fifth of the survey month. This procedure allows responses to be based on about three weeks of information concerning operations and on general knowledge about plans and expectations for the remainder of the month. Replies are requested to be returned by about the fifth of the following month. Each month, once the data are accumulated, the percentages of respondents showing improvement, deterioration, or no change for each activity indicator and time period are calculated. Final tallies for the initial survey release are completed by the tenth. Any late responses are incorporated into revised tallies. Summary statistics are revised only once and only to incorporate late survey responses. Release data are based solely on respondent information; there are no imputations or estimates for firms not replying.
Using the Data
The aggregate pattern of survey responses showing decrease, no change, and increase (see Table 2) provides information about changes in basic demand and supply flows as well as other data on items such as inflation and investments. This information should provide insight into manufacturers' current and expected performance. For example, data on monthly directions of change in new and unfilled orders, along with information on inventories, may indicate whether changes in production are likely. Data on directions of change in finished goods prices, raw materials prices, and supplier delivery time may serve as a rough inflation barometer. Information on directions of change in number of employees and the average workweek can provide insight into income trends as well as what plant managers believe about the degree to which production trends are sustainable.
Each of the survey's three time perspectives provides insight. Monthly comparisons, for instance, show progress over the current phase of the business cycle. Year-ago comparisons delineate longer-term trends and help indicate possible remaining seasonality in responses. Responses concerning expectations six months ahead (compared with current levels) can help ascertain whether recent changes in activity are expected to be temporary or not.
The regional economists and analysts of the Atlanta Fed's research department use the survey data to complement other information on the manufacturing sector. As the survey data suggest production trends, for example, other indicators, including regional employment and income as well as anecdotal evidence from contacts, can be monitored for confirmation.
To simplify determining how widespread changes are among respondents and comparing responses over time, the Atlanta Fed also calculates a statistical measure known as a diffusion index for each response category. A diffusion index is a tool used to gauge the similarity of individual reporter's changes in a particular category and time period.
The manufacturing survey's diffusion indexes -- one for each time period of each indicator surveyed, such as production or new orders -- are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines.6 (The percentage of "no-change" responses does not directly enter into the calculation although the number of "no change" answers affects the other two percentages.) If all plants report increased activity for a particular category then the diffusion index for that category equals 100, and if all plants report declines then the category's value is -100. Thus, each diffusion index can range in value from 100 to -100. The logic of this method for calculating the diffusion index is that positive values indicate increased activity at a majority of the plants over a certain time period while negative values indicate decreased activity at a majority of plants.7
Summary of Southeastern Manufacturing Conditions, July 1992
(Percentage of total respondents)a
|Current Month versus
|Current Month versus
Six Months Ahead
|Decrease||No Change||Increase||Decrease||No Change||Increase||Decrease||No Change||Increase|
|Industry Business Conditions|
|What is your evaluation of business activity in your industry?||25.0||51.5||23.5||25.0||23.5||51.5||15.7||27.6||56.7|
|Volume of shipments||32.1||39.4||28.5||20.1||26.1||53.7||13.4||35.8||50.7|
|Volume of new orders||27.9||43.4||28.7||25.6||27.8||46.6||14.3||31.6||54.1|
|Backlog of orders||25.4||53.0||21.6||23.1||41.8||35.1||18.5||45.9||35.6|
|Plants' finished goods||35.9||45.0||19.1||39.5||28.7||31.8||32.3||46.9||20.8|
|Number of employees||18.8||60.9||20.3||34.1||29.6||36.3||18.2||53.3||28.5|
|Average employee workweek||16.1||67.9||16.1||17.9||50.0||32.1||13.2||69.1||17.6|
|Prices received for finished products||16.1||74.5||9.5||30.1||41.4||28.6||12.9||59.8||27.3|
|Prices paid for raw materials||8.3||73.5||18.2||13.4||35.8||50.7||4.4||54.8||40.7|
|New orders for exports||9.5||75.9||14.7||10.8||64.2||25.0||2.5||70.5||27.0|
|Supplier delivery timec||6.9||87.0||6.1||10.9||71.9||17.2||3.9||79.8||16.3|
|a Normal seasonal fluctuations are taken into account. Figures may not sum exactly to 100 because of rounding.
b Because firms plan capital expenditures on a long-term basis, this question is not applicable to month-ago comparisons.
c Decrease = slower; increase = faster.
Interpreting the Indexes. Although the Atlanta Fed survey does not collect data on specific levels of activity and cannot be used to deduce such levels, the diffusion indexes provide an indicator of the direction of changes in various types of manufacturing activity. Moreover, statistical studies indicate that over an extended period the level of diffusion indexes correlates well with growth rates in the economy (Ethan Harris 1991). See Table 3 for diffusion indexes from the Atlanta survey for month-ago and six-months-ahead comparisons during the December 1991-July 1992 period.
Diffusion Index Summary of
Southeastern Manufacturing Conditions, July 1992
|Current versus Previous Month|
|Industry Business Conditions||-1.5||37.4||18.2||35.4||34.8||14.6||3.8||-22.6|
|Volume of shipments||-3.6||33.0||13.4||27.3||39.4||19.5||11.5||-13.0|
|Volume of new orders||0.7||24.6||23.9||26.5||42.6||13.3||10.3||-20.4|
|Backlog of orders||-3.7||10.4||1.8||11.3||19.1||4.9||-7.9||-32.1|
|Plants' finished goods||-16.8||1.8||0.9||-3.1||12.5||14.3||6.8||-13.7|
|Number of employees||1.4||15.4||1.8||13.3||5.4||3.7||-11.5||-11.3|
|Average employee workweek||0.0||18.8||2.7||16.0||8.6||10.0||1.3||-5.8|
|Prices received for finished products||-6.6||-0.9||3.6||0.0||-1.1||-2.6||-18.7||-5.9|
|Prices paid for raw materials||9.8||19.1||16.4||15.3||15.1||7.6||10.5||9.6|
|New orders for exports||5.2||14.3||9.8||21.2||17.1||8.3||11.7||4.3|
|Supplier delivery timea||0.8||8.0||0.0||2.1||-4.3||10.3||22.2||3.8|
|Current Month versus Six Months Ahead|
|Industry Business Conditions||41.0||41.5||49.1||54.2||59.6||60.0||45.5||47.2|
|Volume of shipments||37.3||31.5||42.3||57.1||57.1||56.3||56.0||53.7|
|Volume of new orders||39.8||29.7||42.3||54.1||58.2||58.5||58.7||60.4|
|Backlog of orders||17.0||18.9||23.9||25.0||30.0||33.8||32.9||31.5|
|Plants' finished goods||-11.5||-18.1||-24.5||-19.8||-11.6||-15.6||-8.3||-6.0|
|Number of employees||10.2||8.0||10.7||24.0||18.7||22.0||25.0||20.8|
|Average employee workweek||4.4||-8.0||6.3||11.1||9.9||6.3||11.8||9.6|
|Prices received for finished products||14.4||24.5||26.6||28.9||27.5||21.5||21.9||49.0|
|Prices paid for raw materials||36.3||41.1||33.9||27.6||29.7||36.3||31.5||41.2|
|New orders for exports||24.6||20.8||18.9||27.3||33.7||28.0||31.3||30.0|
|Supplier delivery timea||-12.4||-5.6||-10.3||-4.2||-16.3||7.4||11.0||7.4|
|a Percent slower minus percent faster.|
By showing to what degree the number of plants with gains offsets those indicating worsening conditions, diffusion indexes indicate the direction of general trends for particular facets of manufacturing. The higher the index number in absolute terms (the closer the index is to 100 or to -100), the greater is the similarity of change among the responding firms. As indicated above, the closer index values are to 100, the more prevalent gains are among respondents; the closer values are to -100, the more prevalent declines are. An index level of zero indicates that the number of plants expanding and those contracting is evenly balanced.
The Survey of Southeastern Manufacturing Conditions has proved useful to the Atlanta Fed in monitoring regional economic developments. Over time the accumulated survey data can be evaluated statistically along with other indicators to provide greater depth of information about both the regional and national economies. In the longer run, because its data base includes background information on plants for a large number of factors not available in other series, the survey may provide a basis for research on manufacturing's cyclical behavior.8 The data aggregated by various background factors could provide valuable insight into the long run behavior of manufacturing plants in the Southeast.
|1.||The Beigebook is sent to Congress and the Federal Reserve Board of Governors and is made available to the public through the news media. It is released about a week before meetings of the FOMC, which meets eight times a year.
|2.||The Sixth Federal Reserve District encompasses Alabama, Florida, Georgia, the southern halves of Louisiana and Mississippi, and the eastern two-thirds of Tennessee.
|3.||Manufacturers of tobacco products and leather are not represented because of their very small share in the region's manufacturing output.
Industrial classification refers to the grouping of reporting establishments on the basis of their major product or activity as determined by the establishments' percentage of total sales or receipts. The Atlanta Fed's manufacturing survey data are currently classified in accordance with the Standard Industrial Classification Manual (Office of Management and Budget 1987). The SIC codes indicate the level of aggregation of data. A two-digit code signifies a broader level of aggregation than, say, a five- or six-digit classification.
|4.||The Census of Manufactures takes place only every five years; 1987 data are the most recent. When data for the 1992 Census of Manufactures become available, they will be used as a basis for stratifying the Atlanta Fed survey.
|5.||This method of measuring manufacturing production by industry is similar to that used by the Federal Reserve Board's national index of industrial production (see Board of Governors 1986). This procedure contrasts with counting physical units coming off an assembly line. Output for a given industry includes the value of the inputs. Counting output for all industries would involve double counting and overstate the contribution of manufacturing to overall output.
|6.||The Atlanta Fed manufacturing survey's diffusion index is analogous to the fairly well-known diffusion index of employment change published by the U.S. Bureau of Labor Statistics, which measures the percentage of industries that posted increases in employment over specified time spans such as monthly and six-month periods. (For example, see U.S. Department of Labor 1992.)
|7.||The Bureau of Labor Statistics (BLS) and the National Association of Purchasing Management (NAPM), for example, calculate their indexes by determining the percentage of positive responses and adding to this one-half of the no-change responses. This method produces diffusion index ranges from 0 to 100, with 50 being the break-even point. Values above 50 indicate that positive responses outnumber negative responses; values below 50 indicate the opposite.
In both the Atlanta Fed and BLS/NAPM methodologies, respondents have only three choices for answers (decrease, no change, increase), so a diffusion index based on a combination of any two answers provides the same information as any other combination of the answers. (Any combination of two out of three responses will yield the same information as long as the combinations are linear in construction. Essentially three variables are set equal to a constant [100 percent] and two of the variables are known.) Using either methodology, one could construct an index based on negative and no-change responses that would have the same relative movement.
|8.||This background information includes industrial classification size of firm by number of employees, geographic location (state), union or nonunion status, domestic or foreign ownership, and vintage of plant according to the date of plant construction or last major capital improvement.|
Bell, John, and Theodore Crone. "Charting the Course of the Economy: What Can Local Manufacturers Tell Us?" Federal Reserve Bank of Philadelphia Business Review (July/August 1986): 3-16.
Board of Governors of the Federal Reserve System. Industrial Production, with a Description of the Methodology. Washington, D.C., 1986.
Chmura, Christine. "New Survey Monitors District Manufacturing Activity." Federal Reserve Bank of Richmond Cross Sections (Winter 1987/88): 9-11.
Federal Reserve System. Current Economic Conditions by Federal Reserve District. Published eight times annually.
Harris, Ethan. "Tracking the Economy with the Purchasing Managers' Index." Federal Reserve Bank of New York Quarterly Review 16 (Autumn 1991): 62.
National Association of Purchasing Management. The Report on Business: Information Kit. Tempe, Ariz.: NAPM Information Center, 1990.
Office of Management and Budget. Standard Industrial Classification Manual. Springfield, Va.: National Technical Information Service, l987.
U.S. Department of Labor. Bureau of Labor Statistics. "Diffusion Indexes of Employment Change, Seasonally Adjusted" (Table B-6). Employment Situation. Washington, D.C., August l992.