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Economy in Brief

Philadelphia Fed Index Highest Since 2005
by Tom Moeller August 18, 2006

For August, the Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector improved to 18.5 from an unrevised 6.0 during July. The rebound by far outpaced Consensus expectations for an uptick to 8.0 and was to the highest level since April of last year.

During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.

A higher level of shipments drove much of the improvement as the index rose twelve points to 22.3, its highest since March. The new orders sub-index also recovered most of the prior month's sharp decline. Moving in the other direction, the employment index reversed most of its July rebound but still indicated positive growth in factory payrolls. During the last ten years there has been a 75% 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 prices paid index fell sharply to the lowest level since April. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.

The separate index of expected business conditions in six months reversed about all of its July improvement and during the third quarter the average monthly level (11.4) is down sharply from 2Q (19.2). Notably, expectations for orders and employment were either stable or improved during 3Q versus the 2Q average.

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

Philadelphia Fed Business Outlook Aug July Aug '05 2005 2004 2003
General Activity Index 18.5 6.0 15.5 12.4 28.0 10.5
Prices Paid Index 45.3 50.3 26.9 43.5 51.2 16.8
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