The Philadelphia Federal Reserve Bank reported that it's Index of General Business Conditions in the manufacturing sector plunged this month to -5.7. The decline into negative territory was to the lowest level since June 2003.

The index is a diffusion index for each component or series. It reflects the increase in activity reported less the decrease.

During the last ten years there has been a 59% correlation between the level of the Philadelphia Fed Business Conditions Index and the three-month growth in factory sector industrial production. There has been a 42% correlation with q/q growth in real GDP.

The decline did not represent broad based weakness amongst the sub indexes. In fact new orders, shipments, unfilled orders and vendor deliveries each rose. However, the inventories and the employment indexes 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 fell and reversed increases during the prior two months. 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 further and added to its plunge during November. The latest was the lowest reading in twelve months. Expectations for new orders plummeted but expectations for the number of employees rose.

The latest Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia is available here.