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Economy in Brief

Philadelphia Fed Index Indicates Further Economic Contraction; Rate of Decline Diminishing While Expectations Up Sharply
by Tom Moeller April 16, 2009

The Philadelphia Federal Reserve Bank indicated that economic activity in the region continued to contract during April. The Index of General Business conditions in the manufacturing sector came in at -24.4 versus a reading of -35.0 last month and a low of -41.3 in February. The latest beat expectations for a reading of -32

Though the latest figure remained negative it may indicate that the decline in economic activity is moderating. During the last ten years there has been a 70% 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 64% correlation with q/q growth in real GDP.

The Philadelphia Fed constructs a diffusion index for total business activity and each of the sub-indexes. The business conditions index reflects a separate survey question.

Amongst the sub-indexes the new orders component improved to the highest level since January as 19.8% of respondents reported higher orders. That was double the March low. The index of unfilled orders also rose to its highest since last September. Still under pressure, however, was the employment index which improved just slightly from the March record low. Forty-five percent of respondents expected to reduce employment levels, while only 0.2% expected to raise them. During the last ten years there has been a 79% correlation between the index level and the m/m change in manufacturing sector payrolls.

The prices paid index at -31.5 was near the record low. Five percent of respondents planned to raise prices while thirty six percent expected to lower them. During the last ten years there has been a 73% correlation between the prices paid index and the three-month growth in the intermediate goods PPI. There has been an 82% correlation with the change in core intermediate goods prices.

The separate index of expected business conditions in six months improved its highest level since late 2007. The expectations index for new orders and shipments surged but expectations index for employment improved just moderately.

The figures from the Philadelphia Federal Reserve can be found in Haver's SURVEYS database.

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

Philadelphia Fed (%) April March April  '08 2008 2007 2006
General Activity Index -24.4 -35.0 -21.1 -21.3 5.0 8.0
Prices Paid Index -31.5  -31.3  53.8 36.4 26.3 36.7
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