The Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector improved sharply this month. The rise to 10.9 more than reversed the deterioration down to 0.0 during August.

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 43% correlation with q/q growth in real GDP.

The sub indexes for new orders and inventories accounted for most of the rise in the overall index. Shipments improved only marginally while the indexes for unfilled orders and employment both fell. 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 reversed some of its deterioration in August but remained near its low since February. 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 fell slightly but remained near its best level since late in 2004. Expectations for new orders were quite firm and though expectations for the number of employees fell from its recent high, it remained firm.

Subprime Side Effects in the Federal Funds Market from the Federal Reserve Bank of St. Louis can be found here.