Last week, investors were optimistic regarding the stronger than expected and positive Empire Manufacturing report which suggested economic activity for February was picking up steam. A lot of that optimism was lost this morning as the Philly Fed report came in weaker than expected and was negative. Given that the Philadelphia and New York Fed districts border each other, you would think that the manufacturing climate in each region would be similar, but lately that has not been the case. As shown in the chart below, for the last several months, each move higher in the Philly Fed seems to have been accompanied by a move lower in the Empire Manufacturing and vice versa.
This trend of divergence between the New York and Philadelphia Fed reports is a new phenomenon. Historically, the two indicators have followed each other pretty closely. Going back to 2001, the two reports have either both been positive or both been negative 83% of the time. In the last year, though, there have only been two months where both indicators were positive and just three where both were negative. The chart below shows the rolling twelve month total where both indicators were pointing in the same direction of growth (positive) or contraction (negative). From mid-2002 through last year, there were only two months where the rolling average went below 75%. Since then, though, the positive correlation between the two indicators has been non-existent to the point where they are more inversely correlated than positively correlated. What gives?