The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed reversed all of the prior month's improvement and fell 18.0 points to 7.3, its lowest level since June 2003. Consensus expectations had been for a lesser decline to 17.3.

During the last ten years there has been a 68% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 52% correlation with q/q growth in real GDP.

The shipments index reversed all of the prior month's sharp increase and about halved to the lowest level since 2003 while the number of employees index also fell sharply to the lowest since 2003. During the last ten years there has been a 64% correlation between the employment index and the three month growth in factory payrolls.

The business conditions index reflects a separate survey question, not the sub indexes.

The separate index of expected business conditions in six months improved moderately to the highest level this year.

The prices paid index slid sharply again and at 30.9 is less than half the peak level of January 2005. During the last ten years there has been a 75% correlation between the prices paid index and the three month growth in the intermediate goods PPI. The correlation with the finished goods PPI has been 50% and with the CPI it's been 43%.

The Philadelphia Fed index is based on a survey of 250 regional manufacturing firms, but these firms sell nationally and internationally.

The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found here.

Modeling Inflation: A Policymaker's Perspective, today's speech by Federal Reserve Board Governor Donald L. Kohn is available here.